Lululemon Athletica (LULU) is the IBD Stock Of The Day and Q1 earnings topped forecasts though guidance was light. LULU stock, as it's known by its ticker symbol, is working on a flat base and was candidate for a bullish earnings options trade, but the trade came at a cost.
Learn more at ibkr.com. Money is important and one key way to make LULU stock jumped to 182.89 shortly after the open, briefly topping a 179.60 buy point. Shares were volatile, rising 4.8% to 179.06 recently, just below that entry.
EPS grew 34.5% to 74 cents, beating Zacks views of 71 cents, as revenue climbed 20% $782.3 million, above the estimate of $757.1 million. Same-store sales jumped 14%, topping the 11.3% that analysts polled by Consensus Metrix predicted.
For Q2, management sees EPS of 86-88 cents, below consensus views for 89 cents, on revenue of $825 million-$835 million, largely below consensus for $832 million.
Lululemon raised its full-year EPS outlook to $4.51-$4.58, up from a prior view of $4.48-$4.55 but still below consensus for $4.60. It also raised its revenue view to $3.73 billion-$3.77 billion, up from a prior view of $3.7 billion-$3.74 billion but also below consensus for $3.91 billion.
Lululemon's core women's business continues to thrive, but the company also has expanded successfully into the men's category, as well as new markets like Europe and Asia.
Lululemon recently outlined a five-year growth plan that analysts lauded. The company plans to more than double men's revenue by 2023, while expanding its women's and accessories business. The retailer also said it expects to double its digital revenue and quadruple international sales.
LULU Stock Analysis
Headed into the report, LULU stock was working on a flat-base with a 179.60 buy point.
The stock came through the market correction in fine form, declining no more than 10% from its high. Lululemon closed Wednesday just below its 50-day moving average, but that line is only about 5% away from the stock's prior highs. Up/down volume ratio and the Accumulation/Distribution Rating indicate solid demand for the stock.
LULU Stock: Options Trading
A basic options trading strategy around earnings using call options allows you to buy a stock at a predetermined price without taking a lot of risk. Here's how the options trading strategy works:
First, identify top-rated stocks with bullish charts. Some might be setting up in sound bases. Others might already have broken out and are getting support at their 10-week moving average for the first time. Still others might be trading tightly near highs, refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.
In options trading, a call option is a bullish bet on a stock. A put option is a bearish bet. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price. A put option gives the holder the right to sell 100 shares of a stock at a specified price. You earn profits when the stock falls below the strike price with a put option.
Once you've identified some bullish earnings setups for a call option, check strike prices with your brokerage. Look for a strike price just above the underlying stock price (out of the money) and check the premium. The premium ideally should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn't too expensive.
Choose an expiration date that fits your risk objective, but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a cost.
When shares were trading around 170 midday Wednesday, a call option with a 170 strike price (June 14 expiration) came with a premium of around $8.75, or 5.1% of the underlying stock price.
One contract gave the holder the right, but not the obligation, to buy 100 shares of Lululemon at 170 for a total cost of $875, excluding commission.
The most that could be lost on the trade is $875 — the amount paid for the contract. When taking the premium paid into account, Lululemon would have to rally past 178.75 for the trade to start making money.