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Shares of Lululemon Athletica inc. (NASDAQ: LULU ) have tumbled and cartwheeled their way lower. Now it may be time to establish a less sweaty, bull put spread as LULU stock tries to find a technical floor. Let me explain.
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What a fall it's been - and I mean that both literally and figuratively for yoga-centric, fitness outfit Lululemon. An earnings confessional in early September sent what had been a modest pullback near all-time-highs, into a corrective move in excess of 30% in LULU stock over the past several weeks.
The thing is though, LULU stock's report wasn't unhealthy. Highlights such as Lululemon delivering in-line earnings of 38 cents and profit growth of 11.8%, sales growth 13.6% and opening 43 new retail stores are a testament to that.
Nevertheless, single-digit growth trends, traffic headwinds and modestly weak (but in-range) full-year guidance have LULU stock acting like a patient in cardiac arrest.
But is the story really over for LULU stock, though? Probably not.
Lululemon does, pardon the pun, have a leg up on the competition with its robust digital strategy, as well as Lulu's lifestyle, purpose-driven branding which maintains a stickiness with Millennials. Both should prove strong drivers for continued growth.
And if you believe Lulu remains "a rare gem among an increasingly difficult retail environment" , as CNBC's James Cramer championed on September 22 and a couple weeks after the earnings fallout; it may be time to finally act.
LULU Stock Weekly Chart
Click to Enlarge As noted earlier, LULU stock's continued technical tumble on its price chart has worked its way into a correction just in excess of 30%. For growth stocks, declines of this magnitude are typical during times when the company's story or narrative grows pessimistic.
The good news is, if Wall Street is overreacting, LULU stock should have no trouble becoming fashionable again down the road. This strategist believes that could be the situation here.
Technically, with Lulu shares wedged between two key yearly 62% weekly retracements, sporting an oversold stochastic and still in an uptrend - there is evidence Lululemon could bounce back. Sure, LULU stock could go lower, but it's probably a good time for some "floor exercises" to begin.
LULU Stock Bull Put Spread Strategy
In the near term, a bounce might be anticipated. A forceful and more meaningful rally, however, is probably still a ways out. If you're looking to capitalize on LULU stock on building a floor, selling an out-of-the-money bull put spread is attractive.
A LULU stock bull put spread makes sense as we see limited near-term upside and allows the trader to capture income as long as LULU doesn't simply continue to crater lower. What's more, if Lululemon doesn't cooperate, the risk is defined without having to rely on a fickle stop loss.
Reviewing the Lululemon options board, with shares at $56.75, the Nov $55/$52.50 put spread trades for a 70 cent credit and fits in well with what's been discussed.
If LULU stock is above $55 at expiration this bull can capture the full credit for a return of 39% in just one month.
The payoff lines up nicely with this week's low of $54.87 in LULU stock and means the trader has a margin of safety of sorts of 3% on collecting the credit and roughly 4.25% of buffer in breaking even on an expiration basis.
The information offered is based upon Christopher Tyler's observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. Mr. Tyler currently holds no positions in any of the securities discussed in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.
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