Lululemon, maker of fine athletic ware recently fell on hard times, and I’ve watched it stock fall from a high of $82 to just under $40 a share. This reminded me of the Netflix blunder, when I watched the shares tumble even though the general business was doing fine. Here, it seems the CEO made a disparaging remark about overweight people.
You can see that LULU traded above $60 for the entire year in 2013. And in my opinion, it’s oversold, likely to recover to the $60s. For this trade, I looked at the Jan, 2016 strikes, $50 and $60. This was what the trade looked like earlier this week:
This chart shows the potential profit or loss on this call spread. You can see, my intention was to buy the $50 strike, and sell the $60. The difference between the two was just under $2, so if I traded 10 contracts, I’d be risking $2000. In 17 months, if LULU traded at or below $50, it would be a loss. Like rolling snake eyes in Vegas. But at $60, I’d have $10000, jackpot. You’ll note the high bid/ask spread. It looks like I’d expect to pay $2.50, but that wasn’t the case.
I entered a limit order at at $2, but it filled at $1.70. So the spread cost me $1700, a bit better than the image for P/L shows. Just under a 6 to 1 return if the stock moves up 50%. Leverage? Yes. Disclaimer – I don’t call this investing. It’s a gamble. The question remains, is this stock down on fundamentals, or due to a short term publicity black eye? Is the chance for a 50% recovery from this low really 6 to 1? We’ll see. Stay tuned.