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Trader's Radar: Going Vertical in Lululemon

Chris Tyler, Optionetics.com
February 4, 2011

Yoga-centric apparel and accessory outfit Lululemon (LULU) is breaking out in Friday’s early action. Following Thursday’s slightly low attendance attempt by bulls to stretch higher from a high level “W” or double bottom base pattern, volume is well-above average with shares up 4.25% and roughly 1% to 2.50% above those sometimes elusive price levels known as the proper buy point per the workings of growth savvy market watchers Investor’s Business Daily.

Thus far, the now at-the-money February 75 call and out-of-the money 80 call are the most active options on the board. Volume totaling roughly 2,000 contracts follows Thursday’s concentrated efforts of 2,000 of the then out-of-the money Feb 75s closing at $1.35 and now doubled in price to $2.70 per contract with shares at 75.15. I guess you could say those traders have “Doubled their pleasure” with this growth stock currently ranked No. 1 in IBD’s IBD 50 listing.

Figure 1: Lululemon (LULU) Daily

Premiums in LULU are reasonable in the mid 40s compared to range statistical and implied values of the past two to three months. That said though, liquidity provision drops off past the March contract while high short interest of nearly 22% and attached days-to-cover ratio of 4.00 pose extra considerations for traders regarding strategies such as time spreads and any possible involvement with short stock inventory. As much and much like Friday's quick vertical move in shares, going vertical as only an option trader can, might be a nice move to think about.

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site