EOT Trade Alert – June 4, 2015

Trade Alert:

Buy LULU June 19th 2015 $65.00 calls at $1.80 or better

 

Company Background:

Lululemon Athletica (LULU) designs and markets athletic apparel through their company owned stores and via the internet.

 

Short-Term Catalyst:

LULU has everything I look for in a short-term trade with the potential for a massive profit.

The main catalyst is their quarterly earnings that they will report on June 9th. They’re expected to report 33 cents per share.

The stock was on fire until they reported earnings back in March… it had doubled from the 52-week lows. Then they gave a disappointing outlook for 2015 despite a better than expected end to 2014.

At the time, Lululemon forecast EPS of 31 cents to 33 cents, below analysts’ call for 39 cents. They also forecast revenue of $413 million to $418 million, below the $442 million in revenue analysts were forecasting.

As a result, the stock has stagnated and put in a bearish reversal pattern near the $70.00 highs. But the stock has been holding above a key technical support around $59.00.

What’s more, this bearish chart pattern has sucked in massive amounts of short sellers. More than 11% of the float is shorted.

Here’s the deal…

I think management sandbagged their first quarter estimates. Don’t forget, this company has had some major managerial issues over the last year and the current regime wants to beat Wall Street expectations.

I think the company is poised to earn closer to the 39 cents per share on $442 million in revenue they were expected to make before their weak forecast in March.

This should trigger a nice rally in the stock.   But that’s not all… it should also force the shorts to cover. And there’s nothing like a good short covering rally to send a stock soaring higher in a short period of time.

Let’s grab call options on LULU ahead of their earnings in anticipation of a better than expected estimates and a short covering rally.

 

Trade Details:

Underlying Stock Symbol:	LULU
Current Bid-Ask Price:	$1.53- $1.71
Option “Buy Up To” Price:	$1.80
Break-Even On Stock At Expiration:	$66.80
Maximum Risk Per Contract:	$180

 

Exit Strategy:

LULU is trading at $61.43 per share.  Resistance levels will be at $68.00 and again at $70.00. Remember, we want this stock to move higher.  Support levels will be at $58.00 and $56.00. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

 

Chart:

 

Category: EOT Trade Alert