OPTIONS TRADERS CO-OP

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Options Play $LULU

First we will examine the stocks historical earnings performance record. We can see that over the past 8 quarters the stock has rallied 4 times on earnings day with an average move of 12%. This does not tell us that the stock is guaranteed to rally this quarter but it does show us that there is a slight neutral bias in the performance of LULU on earnings day. This means that as we work through the rest of our analysis will have a bullish bias.

With a sense of how the stock has moved on earnings day in the past we can calculate the expected movement for this quarter. To best isolate the expected movement in LULU we will use the shortest dated options that still contain the catalyst event. In this case we will use the June 2nd weekly expiry. To measure the market makers expected move we will need to calculate the price of the at the money straddle. We looked at the LULU $548.50 strike straddle in the June 2nd weekly expiry and it is implying a whopping $5.00 move.

$LULU Straddle
The straddle is marking around $5.00. This implies an expected move of around $5.00. This implies a move of around 10.3% by Friday’s expiry. Since this is in line with the stocks historical movement record we know that there an opportunity to put on a good reward vs risk setup LULU

Upside target = $48.50 + $5.00= $53.50

Downside Target = $48.5 – $5.00 = $43.50

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