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Lulu 2018 Call Spread

Lululemon Athletica has been an interesting stock to follow. It tends to tank on bad news, yet always seems to recover nicely. This becomes an opportunity to trade a call spread. From a high of $80 just 8 months ago, it’s dropped to $55, risen past $65, then below $50 on bad new guidance. On April 3, 2017, this was the trade I was considering.

The price of the shares was $49.75. The Jan $50 calls were $6.35, the Jan $60 calls, $2.75. The call spread profit potential is illustrated above. At expiration, I need Lulu to be at or above, $53.60 to breakeven, and I have a maximum gain of $6400 if it trades at $60 or above. The potential is not quite a triple, it’s 2.78X times the money bet. Below is the fill that I got.

Note: The P/L snapshot was taken seconds after my trade filled, so it would reflect my numbers. You can see the tremendous leverage this option spread offers. It returns -100% for a flat stock price, but as much as +178% for a 20% move from the current price. You can also see that if Lulu were to get back to its recent high of $80, the value of this spread would get well above $9000, and I’d probably close it out early. Look at the Lulu chart, and recent news, and tell me if you don’t agree this trade may have been a good one. Last, I wrote A LULU of a deal nearly 3 years ago, a similar trade, call spread, only I was hoping the move would be twice as far, it would need a 50% move for me to make a 500% return. The stock didn’t hit $60, it closed at expiration at $55.71, and my $1700 ‘bet’ returned $5650. Not bad for a failed trade.

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