Call Options Or Put Options On Lululemon (LULU)?

| June 12, 2013 | 0 Comments

Herbalife OptionsLululemon (LULU) produces athletic apparel for women, men, and female youth.  The company’s line of apparel includes fitness pants, shorts, tops, and jackets for healthy lifestyle activities such as yoga and running.  Women’s yoga pants are what LULU is known best for.

LULU is currently trading for $67.85.  The shares are up 30% from the 52-week low of $52.20 and are 18% below the 52-week high of $82.50.  However, the shares are down 16% over the last week.

Is this an opportunity to buy call options on LULU due to overselling based on the CEO’s surprise departure?  Or should you buy put options on LULU because the CEO leaving unexpectedly is a sign there could be bigger problems beneath the surface?

The bulls make a convincing argument…

CEO Christine Day surprised investors by resigning this week after five and a half years.  She says she’s leaving for personal reasons and the company is ready for a new CEO to take them to the next level.

Some feel she’s been pushed out after the infamous yoga pants recall this year (due to over-sheerness of the material).  However, despite the recall, Day led the company to post a 21% year over year gain in revenues in the most recent quarter – including a 7% increase in same-store sales.  It’s also a sign the recall didn’t damage the company’s reputation among customers.

It hardly seems like LULU is struggling.  Whatever reason for Day’s surprise exit, it seems investors (or short-sellers) are hitting the stock overly hard.  That’s always a great time to bet on the upside.

But the bears have a compelling case as well… 

CEOs of major companies rarely just leave when things are going well.  There’s almost always a reason which goes beyond “personal reasons”.

The yoga pants recall was a major black eye for the popular company.  And, the impact may not yet be apparent in the quarterly financials.

Perhaps most importantly, even after this week’s 16% drop, LULU is still trading at a lofty 35x earnings.  That’s high for any company, but especially for one with an unknown, upcoming CEO and revenues based almost solely on a brand name.

Is LULU’s recent price dip a buying opportunity?  Or is the CEO’s surprise departure a sign of greater problems to come?

If you think the bulls are right, take a look at buying the LULU July $70.00 calls for around $2.50.

If you think the bears are right, take a look at buying the LULU July $65.00 puts for around $2.00.

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.