Volatility Expectations Surge on Lululemon Stock Options Before Earnings

It's getting pricey to purchase premium on short-term LULU options right now

Aug 30, 2017 at 9:49 AM
facebook X logo linkedin


Lululemon Athletica inc. (NASDAQ:LULU) is due to report second-quarter earnings after tomorrow's close. Shares of the yoga apparel retailer have a history of making volatile post-earnings swings, including an 11.5% pop in early June, and a 23.4% plunge last March. On average, LULU stock has moved 13.2% in the session subsequent to earnings over the past eight quarters, with the options market pricing in a bigger 16.7% swing for Friday's trading. 

In the options pits, traders have rarely been more call-skewed toward LULU's short-term contracts over the last 12 months, per the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.62 -- in the 8th annual percentile. Drilling down, peak open interest of 12,842 contracts is found at the September 62.50 call, while the September 70 call comes in at a close second with 12,640 contracts outstanding.

The lower-strike call was in focus yesterday, when 4,755 contracts traded -- making it LULU's most active option. Diving deeper, it looks like one speculator bought to open 2,000 September 62.50 calls, while simultaneously selling to open 4,000 September 69 calls, creating a call ratio spread. They further reduced their net debit by selling 2,000 September 50 puts -- effectively setting expectations for a near-term floor at $50 and ceiling at $69.

However, this trader may have also been taking advantage of elevated pre-earnings volatility expectations on LULU -- which makes premium more expensive, historically speaking. While the equity's Schaeffer's Volatility Index (SVI) of 67% ranks in the 78th annual percentile, its 30-day at-the-money implied volatility of 55.7% is docked 1 percentage point from a 52-week peak. A post-earnings volatility crush will make it cheaper to buy back the short calls.

On the charts, Lululemon shares have not closed north of $70 since this time last year, with the level effectively capping the stock in early December and mid-January. And while LULU briefly broke below $50 in May -- hitting an annual low of $47.26 on May 31 -- it's tacked on 24% since then to trade at $58.40. Nevertheless, this security is now struggling to fill its late-March earnings-induced bear gap, which would require a move north of the $64-$66 region.

lulu stock daily chart august 31

 

Unlock Weekend Profits with Chris Prybal's Favorite Strategy Up +487.5% in 2024

With the markets going left, right, and sideways, you need to have a plan now more than ever. 

Expert Trader Chris Prybal is no stranger to volatility, and has mastered finding big stock rallies while other traders aren't looking over the weekend. Rallies that produced gains like +207% on RTX calls, +236% on MARA calls, and +238% on NET calls.

A few simple moves on Sunday at 7pm could be the “Secret Sauce” your portfolio needs to not just stay afloat, but make unprecedented gains in this turbulent market.


Don’t sit on the sidelines, beat the market with Chris Prybal's strategy. Join him now!

 

 
 
 


 
 

Rainmaker Ads CGI