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
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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


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