Lululemon is down 29% year to date but bounced 5% in the last week.
After volatile moves like this, a stock will sometimes settle down and start to trade in a narrower range. That type of action will be good for an option strategy such as a short strangle.
A short strangle involves selling an out-of-the-money put and an out-of-the-money call with the same strike price with the same expiration date.
This trade generates a large amount of premium for the option seller, but it does come with risks. A short strangle is an unprotected trade, sometimes referred to as a "naked" trade. Naked options can be risky because they expose the trader to potentially unlimited losses if the stock makes a big move.
However, if the trader is right and the stock trades sideways, the trader gets to keep the full premium.
Lululemon Stock Option Trade For May Expiration
Assuming traders believe that Lululemon stock will trade sideways over the next few weeks, they could look to sell a May 17, 340 put and a May 17, 390 call.
The 340 put could be sold for around $1.90 per share late Wednesday, and the 390 call could be sold for around $1.95.
Selling those two options would generate a total of $385 in premium for a block of 100 shares. That is the maximum possible gain on the trade if Lululemon stock closes between 340 and 390 on the day of expiration.
To work out the breakeven price of the trade, take the lower strike price of 340 minus the total premium received of $3.85. The result is 336.15.
Then on the call side, take the call strike and add the premium, which gives 393.85.
This is a short vega trade. That means if implied volatility increases early in the trade, losses could occur.
Short strangles are an advanced option strategy. So if all that sounds confusing, it's best not to trade them.
Unlimited Loss Potential For Lululemon Stock Trade
With a trade like this the potential losses are unlimited and a lot higher than the potential gains. So traders would want to be very confident that the stock is going to remain flat over the course of the trade.
A stop loss could be placed at the breakeven points.
According to the IBD Stock Checkup, Lululemon stock is ranked No. 13 in its industry group. It has a Composite Rating of 73, an EPS Rating of 97 and a Relative Strength Rating of 19.
Lululemon is a leading athletic apparel retailer known for its high-quality yoga and workout attire.
With a focus on innovation, community engagement, and premium branding, Lululemon has cultivated a loyal customer base and experienced strong growth in recent years, making it a compelling investment opportunity in the retail sector.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
