I’ve had several questions about the spread trade in Lulumon Athletica (LULU), which surfaced just before the stock was slammed on earnings news. Shares are off $6.17 to $63.85 following this morning’s profit report. A few hours before the closing bell Wednesday, an investor bought 8,700 June 67.5 puts on the stock for $1.81 and sold 8,700 June 60 puts at 51 cents. The spread, for a $1.30 net debit, was bought 10,000X, according to a source on the exchange floor, for a total premium of $1.3 million. It was an opening play.
If bought, the June 60 – 67.5 put spread on LULU is a bearish position that makes profits if the stock heads lower. The potential profit is equal to the difference between the two strikes minus the debit paid, or in this case $6.20. The downside breakeven at expiration is equal to the higher strike minus the debit, or $66.20. The entire debit is at risk if LULU holds above $67.5 and the position is left open through the expiration.
With LULU trading for $63.85, the spread is obviously a huge winner. Since the spread was initiated the day before earnings and with June options that expire at the end of next week, the position was probably a play on earnings. About 2,400 contracts traded in both the Jun 67.5s and 60s today. So the position has not yet been offset and the spread has widened to $3.30, or an unrealized profit of $2 million. Not bad for one days “work”. That’s why we monitor options order flow.
(Note: Our systems detected the activity and details of the put spread were sent out as an alert to Premium Subscribers at 12:15 EDT yesterday.)
About the Author (Author Profile)
Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.