Lululemon is one of my favorite companies. It’s not because I'm Canadian and it is based in Vancouver, British Columbia. Nor is it because it almost singlehandedly created the athleisure industry. In reality, people wear LULU apparel and footwear today in all kinds of pursuits, not just athletic activities.
Overall, it’s just a great stock, up 2,000% since it went public in July 2007, generating a compound annual growth rate of 19.5% over 22.5 years.
Normally, I discuss three options exhibiting unusual activity in my Friday commentary. However, I thought it might be interesting to look back to early June, precisely three weeks ago from today, to determine which of Lululemon’s (LULU) call options to buy exhibiting unusual options activity.
On June 2, LULU stock closed at $365.44. It had four call options with unusual options activity that day with strike prices between $370 and $400.
My task today is to determine which, if any, of the four calls would have been the best buy. Alternatively, you may be better off just buying the stock and calling it a day.
Either way, have a great weekend!
The First Choice
I’ll start with the call exhibiting the highest unusual options activity. It was the July 21 $370 call with a $13.80 ask price. It had a volume of 1,177, 6.96x its open interest, putting it near the top 100 on June 2.
So, we’re talking about 48 days to expiration and a potential purchase price of $383.80 should you have chosen to act on your right to buy Lululemon shares at the expiry. From its June 2 closing price, that’s a 5% appreciation over seven weeks.
Up 6.8% over the past month, it was more than doable.
However, before we crown the $370 strike as the winner, we must look at the call’s delta. It was 0.50160, which means the ask price doubles if the share price increases by $27.51, or 7.5%.
You put up less than 4% of the share price to buy its stock at $383.80 or generate a gain by selling the call before expiration. If the shares rise to $13 over the next six or seven weeks, your net price paid for LULU shares would be between $5 and $6 above its share price.
So, you might not exercise your right, but you could still make a 50% profit ($690) by selling before July 21.
The Other Choices
The three remaining call options all expired on July 21. They all had Vol/OI ratios between 1.64x and 1.79x. The three strike prices were $380, $390, and $400. Their ask prices were $9.25, $6.00, and $3.85, respectively.
Your first instinct might be to go for the lowest of the three remaining strike prices. It had a delta of 0.39020. Based on the $9.25 ask price, Lululemon’s shares would have to increase by $23.71 (6.5%) for the call’s ask price to double.
The second of three strike prices is $390. It had a delta of 0.28682. Based on the $6.00 ask price, Lululemon’s shares would have to increase by $20.92 (5.7%) for the call’s ask price to double.
The third and final call had a $400 strike and a delta of 0.20197. Based on the $3.85 ask price, Lululemon’s shares would have to increase by $19.06 (5.2%) for the call’s ask price to double.
So, to make money on the call, you might be better off aiming high, going with the $400 strike because the shares would only have to increase by 5.2% to double as opposed to varying percentages between 5.7% and 7.5% for the $370 strike.
How It Turned Out
As I write this on Friday morning, LULU shares are trading at $373.91, 2.3% higher than its June 2 closing price. So, it hasn’t moved nearly enough to make a difference.
As for the various strike prices, the highest ask price is $12.75 for the $370 strike. That’s $1.05 lower than the June 2 ask. The $380 strike’s ask price is $7.55, $1.70 lower; the $390 strike’s ask price is $4.10, $1.90 lower, and the $400 strike’s ask price is $2.08, $1.77 lower.
So, by dollar amounts, the $370 strike held up the best. With 28 days to expiration, it’s $1.05 or 7.6% lower. The $380 strike is 18.4% lower; the $390 is 31.7% lower, and the $400 is 46.0% lower.
If you were thinking about betting on the $370 strike today, based on a $12.75 ask price, the delta is 0.59090. The share price would have to increase by $21.58 to double your money. That’s 5.8% over four weeks.
Still very doable.
Not to mention, your net price paid of $382.75 is only 2.4% above its current share price. Unless there’s some company risk, I don’t know about for LULU, the $370 call looks very interesting at current prices.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
