Lululemon (NASDAQ:LULU) recently experienced a significant downturn, breaking below its 50-day moving average on substantial volume and concluding the session with a 5.73% decrease. The Barchart Technical Opinion rating currently stands at 56% Buy, signaling a somewhat bearish short-term outlook for the stock’s trajectory.
Lululemon Athletica Inc. specializes in designing, manufacturing, and distributing athletic apparel and accessories, catering to women, men, and female youth. Their product line includes fitness pants, shorts, tops, and jackets tailored for various activities such as yoga, training, and running. Additionally, the company offers a range of accessories like bags, socks, underwear, yoga mats, DVDs, water bottles, and other fitness equipment under the Lululemon Athletica brand. The distribution channels encompass corporate-owned and retail stores, outlets, warehouse sales, independent franchises, and a network of wholesale accounts. Lululemon is also actively expanding its online presence through its e-commerce site.
Introducing the Bear Call Spread Trade
In light of recent market developments, a Bear Call spread trade is being considered for Lululemon. This bearish strategy is designed to capitalize on a potential decline in the stock price and benefit from a decrease in implied volatility.
The Bear Call spread involves selling an out-of-the-money call option and purchasing another one further out-of-the-money. Specifically, selling the March 15 put with a strike price of $500 and buying the $510 put would establish the Bear Call spread for Lululemon. The trade, valued at around $1.10 as of yesterday, offers an option premium of $110, with a maximum risk capped at $390.
Potential Outcomes and Risk Management
Should LULU stock remain below $500 by the expiration date on March 15, the trader stands to gain a 28% return on risk. However, if the stock closes below $510, the trade incurs the full $390 loss. The breakeven point for the Bear Call spread is $501.10, calculated by adding the $1.10 option premium per contract to the $500 strike price.
To manage risk effectively, one approach is to set a stop loss equal to the premium received, which in this case would be approximately $110. It is crucial to note that options trading involves inherent risks, and investors can potentially lose the entire investment. This article is intended for educational purposes only and not as a trade recommendation. It is essential to conduct thorough due diligence and consult with a financial advisor before making any investment decisions.
Featured Image: Unsplash
