Lululemon (LULU) broke down through the 50-day moving average on heavy volume yesterday, with the stock closing 5.73% lower.
The Barchart Technical Opinion rating is a 56% Buy with a weakest short-term outlook on maintaining the current direction.
Lululemon athletica inc. designs, manufactures and distributes athletic apparel and accessories for women, men and female youth.Â
The company offers a line of apparel assortment, including fitness pants, shorts, tops and jackets designed for healthy lifestyle and athletic pursuits, such as yoga, training, and running as well as other sweaty and general fitness under the lululemon athletica brand name. Its fitness-related items comprise an array of accessories like bags, socks, underwear, yoga mats, instructional yoga DVDs, water bottles and other equipment.Â
The company sells its products primarily in North America through a chain of corporate-owned and retail stores, outlets and warehouse sales, independent franchises, and a network of wholesale accounts.Â
The company has an e-commerce site with an aim to rapidly expand its online business.
Today, we’re going to look at a Bear Call spread trade.Â
A Bear Call spread is a bearish trade that also can benefit from a drop in implied volatility.
The maximum profit for a Bear Call spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
LULU BEAR CALL SPREAD
To create a Bear Call spread, we sell an out-of-the-money call and then by another call further out-of-the-money.
Selling the March 15 call with a strike price of $500 and buying the $510 call would create a Bear Call spread.
This spread was trading yesterday for around $1.10. That means a trader selling this spread would receive $110 in option premium and would have a maximum risk of $390.
That represents a 28% return on risk between now and March 15 if LULU stock remains below $500.
If LULU stock closes below $510 on the expiration date the trade loses the full $396.
The breakeven point for the Bear Call spread is $501.10 which is calculated as $500 plus the $1.10 option premium per contract.
Conclusion And Risk Management
One way to set a stop loss for a Bear Call spread is based on the premium received. In this case, we received $110, so we could set a stop loss equal to the premium received, or a loss of around $110.
Please remember that options are risky, and investors can lose 100% of their investment.Â
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.
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On the date of publication, Gavin McMaster 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.
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