Put Selling Lululemon Stock (LULU) After The Quarterly Earnings

In my most recent article on Lululemon Stock I looked at how the last quarterly earnings caught a lot of investors by surprise and how over the past 3 months those investors worked their positions to return them to profitability. Here is the link to that article.

Lululemon Stock Quarterly Earnings

Lululemon beat estimates easily increasing their revenue by 22% to 344.5 million from 282.6 million a year ago. Net income however was 56.5 million or 39 cents per share versus 57.2 million or 40 cents a year earlier. Same store sales were up 8%. While I found net income a bit disappointing, the problem for Lulu Stock is forward guidance on earnings outlook for the remainder of the year is not as optimistic and this is hammering Lulu Stock today. The consensus for the next quarter was 44 cents a share on sales of around $389.4 million whereas Lululemon sees earnings in the next quarter close to $370 to $375 million which would means earnings of around 40 cents a share. For the entire year Lululemon sees earnings of $1.94 to $1.98 a share versus analysts view of $1.99 a share.

Lululemon Stock Drop

The drop in Lululemon Stock this morning was to be expected. In my comments in the previous Lulu Stock article I pointed out that there is decent support at the $65 level. The investors who contacted me have sold puts at three difference put strikes, namely $60, $62.50 and $65.00

Morning Drop Was Sold

Many of these same investors on this morning’s action in Lululemon Stock sold additional puts at the $62.50 and $60.00 put strikes. As well others have rolled their Sept 21 $65 puts into October at the same strike – $65 to earn additional income and wait for a bounce back in the stock.

If we look at the past 12 months of Lululemon Stock it is obvious that Lulu stock is now testing longer-term, stronger support levels. By adding in volume to the Lulu stock chart you can see where the main support levels are based on volume. Strong support is at $65 with lesser support at $62.50 and $60.00.

What To Watch When Put Selling These Support Levels

My own preference is Put Selling no closer than $62.50 but I can understand based on support at $65 why an investor would continue to sell puts at the $65 level. If Lulu stock moves somewhat lower for the rest of the year it will most likely continue to revisit $65 which means large premiums can be earned by an investor who wants to “chance” selling at the $65 strike.

The problem for Lulu Stock will be how long support can hold the $65 level. Once the $65 level breaks the remaining two levels of support at $62.50 and $60.00 have far less support. Despite this though I won’t be surprised if the stock drifts lower should $65 break and not plunge. This would give those investors Put Selling the $65 strike plenty of opportunity to roll down their puts if they see the support at the $65 level eroding.

Watching volume will give the first clues whether $65 can hold. If volume does not pick up each time the stock pulls back below $65, then watch for volume to increase at $62.50. If it does then support at $65 is leaving the stock and investors are selling out at $62.50. I will keep Lulu Stock on my radar and write further articles should I see a change in support levels for Lulu Stock.

What Put Strikes To Consider Put Selling

While I personally do not like a stock such as Lulu stock for Put Selling, a case could certainly be made for selling all three put strikes and staggering the volume of put contracts being sold from less to more based on the lower put strikes.

For example:

5 puts sold at $65.00

10 puts sold at $62.50

15 puts sold at $60.00

Total capital at risk of assignment would be $185,000.00. Total shares if assigned on all 3 strikes would be 3000 shares for an average cost basis of 61.66.

Based on the put premiums for Oct 19 options expiry that could be earned this morning:

5 puts sold at $65 for $3.10

10 puts sold at $62.50 for $2.40

15 puts sold at $60 for $1.35

Total income earned = $5975 / $185,000 = 3.2% for one month.

Using Margin For Put Selling

An even nicer trade would be to use capital to secure the $65 and $62.50 naked puts but only use margin for the $60 put strikes which are far enough out of the money that they will probably not be assigned.

Put Selling For Smaller Profits But More Safety

Stocks like Lulu Stock do offer enormous profit-making opportunities with a larger degree of safety if an investor understands support in a stock and also understands how to protect his sold put positions. With volatility higher in Lulu stock over the past 12 months and again during events like this morning, an excellent strategy to consider is selling far out of the money puts and aim for half a percent to 1% returns. For example the $55 put strike for October 19 expiry could be sold this morning for anywhere from .40 to .55 cents. Doing this trade whenever the stock pulls back such as today makes for a very compelling trade while offering superior protection from possible assignment of Lulu Stock.

Over the past 12 months here are the far out of the money put strikes that could have been considered. This would have resulted in 15 Put Selling opportunities and based on prices available it would have returned 11% for the 12 months.

Knowing where support lies within Lulu Stock offers enormous opportunities for safely Put Selling this stock. While Lulu Stock is not among my favorite companies for many reasons, Lulu stock still offers a compelling case for considering it for Put Selling especially for Put Selling far out of the money put options per the above chart and would be my first choice for trading within Lululemon Stock.

For this reason this morning I sold 10 naked puts on Lululemon Stock of the October 19 options expiry at the far out of the money $55 put strike for .55 cents.