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  • Bulls and Bears at Standstill 0 comments
    Dec 9, 2010 12:48 PM | about stocks: LULU
    12:45pm (EST)
     
    The market is trading in a tight range today with much of the action staying on the north side and favoring the bulls. Down south, the bears have made a little noise but better-than-expected economic news has helped the bulls as they make another attempt to break and hold resistance.

    The Labor Department said jobless claims fell 17,000 for the week to 421,000. The number was the second-lowest level for the year and beat expectations of a drop to 429,000.  The four-week average of claims, a less-volatile measure, dropped for the fifth straight week to 427,500.

    Wholesale trade inventories for October were up 1.9%, month over month, which was stronger-than-expected and more than double the 0.7% rise that had been penciled in.

    Turning to earnings, Lululemon Athletica (LULU, $66.20, up $10.50) is up nearly 20% and at new 52-week highs after beating Wall Street’s expectations. The company reported a profit of $25.7 million, or $0.36 a share, versus $14.1 million, or $0.20 a share, in the year ago period. Revenue surged double-nickels (55%) to $176 million from $113 million from last year’s levels.

    The suit-and-ties were expecting a profit of $0.25 a share on revenue of $160 million.

    Back in September, we talked about a strangle option trade for Lulu and profiled the results of an October trade that would have made 52%. These trades are also known as “chicken” trades and can be used if you are unsure on which way the stock will go after the earnings announcement. To be profitable, you need a move of 10%, or more, in the stock.

    Here were our words on three months ago on September 10, after the stock jumped over 10% (quotes from that day):

    “We were watching the October 30 puts (LULU101016P00030000, $0.20, down $0.50) and the October 40 calls (LULU101016C00040000, $2.15, up $1.30) and before the close yesterday these two options would have cost you a total of $1.55.  The put options were at 70 cents while the call options were at 85 cents before they shut the lights off yesterday in the option pits.

    A 10 contract trade would have cost you $1,550 and today the total position would be worth $2.35, or $2,350.  The calls are at $2.15 and the the puts are at 20 cents which gets us this total.  Folks, this is a return of 52% in less than a day.  Not bad.” (NYSE:END)

    Fast-forward to today.Shares were at $55 going into the close yesterday so you could have used the LULU December 60 calls (LULU101218C00060000, $5.40, up $4.50) which were going for 90 cents yesterday and the LULU December 50 puts (LULU101218P00050000, $0.05, down $0.60) which were at 65 cents going into the close.

    The calls have surged 500% while the puts have fallen over 90%. The total cost of the trade would have been $1.55, or $1,550, for 10 option contracts of each. 

    At current prices, the trade is now at $5.40, or $5,400, for a total return of 250%! However ,the big difference this time versus last is the stock moved 20% instead of 10% which for the options was also a big difference. Either way, a 50% or 250% return for being a chicken? Sign us up!
     
     
    We should have listed them on our Watch List but, honestly, our portfolio is so full of good news right now we didn’t have room. 
     
    In the past, we didn’t profile a lot of strangle or straddle option trades but we should of used more of them this year. We have traditionally been a directional based option trading newsletter but market conditions change and so should your strategies.

    A lot of investors feel uncomfortable putting on these types of trades and we haven’t felt the need to hedge because we called for this bullish run at the start of October. Since then, we have been recommending nothing but call options. That will change, and when it does, we may have to use these types of trades as we head into 2011.

    The market has been trending higher since mid-September and while we are bullish, we also know there will be a time to become bearish.

    With that said, we do have a couple of stocks we are keeping an eye on over the next few weeks that are on our Watch List. We have listed a possible strangle trade for each but we are still in the profiling stages. As we get closer to their earnings announcement, we expect to pull the trigger on a trade or two that could top the LULU trades we have outlined.

    We expect both stocks to move at least 10% and last time out, one of them moved over 20% after their earnings announcement.

    We are trying to end the year on big bang and we want you with us before we close out the year and head into 2011. We are excited about the endless possibilities we think we are going to see next year and we want you to be a part of it.

    As we head to press, the action is still flat and has been boring since the quick pop at the open. The Dow is down 28 points 11,344 while the S&P is up a point to 1,228. The Nasdaq is up by 3 points to 2,611. Subscribers, check the Members Area for the updates.
    Stocks: LULU
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