NaughtyPines

LULU (LULULEMON ATHLETICA) 9/10 EARNINGS PLAY

NASDAQ:LULU   LULULEMON ATHLETICA INC
LULU announces earnings on 9/10 before market open, so look to set up your earnings play prior to the 9/9 NY close to take advantage of the volatility crush the underlying's options will experience post-earnings.

Traditionally, I take a nondirectional bias with earnings plays since I do not know how the announcement will turn out and do not know what the market reaction to it will be. Consequently, I generally opt for a nondirectional iron condor or short strangle or, in the alternative, an iron butterly or short straddle in the event I cannot get enough "juice" out of an IC             or short strangle to make the trade worthwhile. Look to take off IC's/short strangles in their entirety at 50% max profit and iron butterflies and short straddles at 25% max.

Because the Sep 11th weekly expiry would provide me with too little time to manage the trade post-earnings, I would probably opt for the Sep 18th expiry to allow time to roll for duration and credit if a side is breached.

EXAMPLES:

A Sep 18th 56.5/75 short strangle: 74% POP; 1.19 credit; undefined BPE.
A Sep 18th 53.5/56.5/75/78 IC: 71% POP; .64 credit; 2.36 BPE
A Sep 18th 65.5/65.5 short straddle: 54% POP; 6.80 credit; undefined BPE.
A Sep 18th 53.5/65/65/78 Iron Butterfly: 50% POP; 6.26 credit; 6.74 BPE

Notes: I would note that the break-evens for the short straddle and iron butterfly are tighter than those of the short strangle and IC             . Although the max profits of the short straddle and IB             are attactive, you'll also notice that the POP%-age is much lower than that for the IC             and short strangle. Generally, where a short strangle or IC             gives me enough juice, those are the setups I go with. The max profit for the IC             here isn't fantastic, especially if you look to take it off at 50% max profit, so my preferred setup in this case would be to go with the short strangle, assuming that I want to devote the buying power to the trade.
NaughtyPines
a year ago
I didn't end up doing this play ... . Thought the better of it going into FOMC with plenty of index trade balls to juggle. That being said, it looks like at least the call side would probably expire worthless and that the put side of, for example, the short strangle or iron condor would have be in breach at this point. There are, however, still a few days for the trade to still "work out," but I would have planned to roll for duration and credit 3-5 days prior to expiration in the event there wasn't a small pop post-earnings ... .
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NaughtyPines
a year ago
Price edged up to 54, which would be below the 56.5 put side of the short strangle, which would have put it in breach. Were I to be in this trade, I would look to roll the put side out no later than Tuesday of this next week to a later expiration for which I could get at least an .11 credit; I would look to allow the call side at 75 to expire worthless. There are two approaches to the roll: (1) roll it out for duration and credit at or near the same strike price and sell calls against and look to close the rolled out put and the calls against for at least a scratch; (2) roll it out for duration and credit, seeking to improve the strike price (in this case, by rolling down) and selling calls against and look to close the rolled out put and the calls against for at least a scratch. Dough/TastyTrade has done some data analysis of the two approaches (rolling the tested side down and out and selling calls against vs. rolling the tested side out, but at or near the same strike price (i.e., no down) and selling calls against), indicating that the leaving the tested side at or near the same strike price is statistically the more successful of the two methods. For me, personally, however, I prefer attempting to improve the strike prices if I can, as long as I can get sufficient credit for doing so, increasing the likelihood I will be able to eventually close the breached side of the setup at scratch or more. (See Dough/TastyTrades "Market Measures/7/10/15 "Rolling Recap" segment for a discussion and analysis of various rolling approaches).
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