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A Bet Against The Crowd Could Double Your Money With This Apparel Maker

Sometimes the most profitable investments are made by going against the grain -- selling when everyone else is buying and buying when everyone else seems to be selling.

Take PR nightmare Lululemon Athletica(NASDAQ: LULU ) for example. The stock is off more than 50% from last summer's highs above $80 on declining sales, competition worries, product recalls, and of course, a big-mouthed CEO (recently former CEO) whose excuse for product defects was "some women's bodies just don't work" for its yoga pants.

Yet LULU is still the top-selling manufacturer of fashionable activewear, according to retail analyst Jeff Green. And on the chart, we saw a bullish divergence, with a new 52-week low made on June 13 without new highs in volatility. This can be a technical sign that a bottom has been put in place in a formerly freefalling stock.

At this point, I'd say the risk/reward favors the bulls. While five-year midpoint support at $40 has been violated, LULU has traded in a range from $35 to $45 for the past three and a half months. An upside breakout of this range targets a move to $55.

-- Buy LULU Jan 25 Calls at $15 or less -- Set stop-loss at $7.50 -- Set initial price target at $30 for a potential 100% gain in five months

A close below $30 in LULU on a weekly basis or the loss of half of the option's premium would trigger an exit. If you do not use a stop, the maximum loss is still limited to the $1,500 or less paid per option contract. The upside, on the other hand, is unlimited. And the January options give the bull trend five months to develop.

This trade breaks even at $40 ($25 strike plus $15 options premium). That is less than $1.25 above LULU's recent price. If shares hit the $55 target, then the call option would have $30 of intrinsic value and deliver a gain of 100%.

Recommended Trade Setup:

-- Buy LULU Jan 25 Calls at $15 or less

-- Set stop-loss at $7.50

-- Set initial price target at $30 for a potential 100% gain in five months

Note: If you're getting less than 18% annual returns, your retirement could be in trouble. A new report shows that unless you make that much, you're probably not going to have a comfortable retirement. With another call option strategy, you could generate as much as $3,410 in income each month. Get the details here.

This article originally appeared on ProfitableTrading.com: A Bet Against The Crowd Could Double Your Money In This Apparel Maker

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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