Lululemon Athletica inc. (LULU) Sees a Rare Burst of Pre-Earnings Put Buying

Lululemon Athletica inc. (NASDAQ:LULU) will report earnings Wednesday, and the stock is facing off with multiple layers of technical resistance

Dec 5, 2016 at 3:15 PM
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Lululemon Athletica inc. (NASDAQ:LULU) is booming, after Wedbush reiterated its "outperform" rating and $70 price target, saying the "bearish view could be overstated." The brokerage also noted that in-line earnings could be all LULU needs to move higher on the charts, given the "relentlessly negative sentiment" levied toward the shares. This upbeat outlook is helping to overshadow Cowen's price-target cut on LULU stock to $72 from $80, although this is still a significant premium over current levels. Specifically, the shares of LULU are up 3.7% at $57.36, but some options traders appear to be setting low expectations ahead of Wednesday night's earnings report, expecting the stock to stall out below key technical hurdles.

Specifically, LULU puts are trading at three times the expected intraday rate, with 16,360 puts on the tape. In fact, with just 14,000 calls on the tape, puts have taken an unusual lead over calls. Pre-earnings put buyers appear to be targeting the December 56 and 56.50 strikes. If this is the case, they are betting on LULU shares to slide below the strike prices by the front-month expiration, at the close on Friday, Dec. 16.

This represents a change of pace to the longer-term trend seen in LULU's options pits, though. Over the past 10 weeks, speculators have purchased more than two calls for each put at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The resulting call/put volume ratio of 2.23 ranks in the top quartile of its annual range. However, with 13.6% of LULU's float sold short, it's possible some of the recent call buyers have been short sellers looking for a hedge.

Regardless, near-term options buyers are currently willing to pay relatively hefty premiums as earnings approach. LULU's short-term options are pricing in inflated volatility expectations ahead of the event, per its Schaeffer's Volatility Index (SVI) of 66% -- near the top third of its annual range. Moreover, the stock's 30-day at-the-money implied volatility of 53.7% sits just 2 percentage points shy of a 52-week high.

Historically speaking, shares of LULU have managed a move to the upside in the session subsequent to reporting in five of the past eight quarters, although the security tumbled 10.6% last September. Meanwhile, the stock tends to make some sizeable moves, too, averaging a one-day post-earnings swing of 10.1% in either direction. At the moment, the options market is pricing in an even wider 15.5% move for Thursday's trading.

On the charts, the shares are up nearly 9% on a year-to-date basis; however, they've dropped nearly 32% since topping out at a three-year peak just south of $82 in August. The stock has been stuck in a choppy sideways pattern between the $54 and $59.50 levels since mid-October, and the 50-day moving average has been bearing down in recent weeks. What’s more, the $58 region also coincides with a 61.8% Fibonacci retracement of  Lululemon Athletica inc.'s (NASDAQ:LULU) August high and November 2015 low.

LULU Daily Chart December 5

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