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.