Call Options Or Put Options On Lululemon (LULU)?

| December 16, 2013 | 0 Comments

Lululemon (LULU) is back in the news after releasing third quarter results.  LULU is a popular, high-end athletic apparel company.

LULU shares are trading at $60.39, down 12% last week and 21% year to date.  The stock’s up just 1% from the 52-week low of $59.60 and is 27% below the 52-week high of $82.50. 

Is this an opportunity to buy call options on LULU because of a possible overreaction on the part of sellers?  Or should you buy put options on LULU because the company’s fourth quarter outlook was well below expectations?

The bulls make a convincing argument…

LULU may have missed investor expectations with its earnings report last week, but the company continues to show strong growth.

In fact, LULU saw 20% year over year revenue growth, with sales of nearly $380 million for the quarter.  Profits also rose from $0.39 per share to $0.45 per share.  How bad can a company be doing when it’s growing revenue and profits?

What’s more, LULU products remain as popular as ever.  With a strong brand name and across the board growth, we’re seeing a classic case of investor overreaction.

But the bears have a compelling case as well… 

While revenue and profits came in as expected, fourth quarter outlook was far worse than projected.  Revenue is expected to be $540 million for the quarter – way below the $689 million initial estimate.

Moreover, EPS is projected to be $0.80 per share.  That’s a huge drop from the $1.00 per share that analysts were expecting.  It’s also troubling to see such a gap during what’s typically the best quarter of the year for retail.

Not to mention, LULU has had one bad PR incident after another this year.  The poor guidance is just icing on the cake for the bears.

So is LULU’s stock being oversold due to an overreaction by investors, or is the worse than expected fourth quarter outlook a reason to take a bearish position?

If you think the bulls are right, take a look at buying the LULU January $65 calls for around $1.00.

If you think the bears are right, take a look at buying the LULU January $57.50 puts for around $1.50.

Yours in Profit,

Gordon Lewis

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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