Lululemon Stock: This Bearish Option Trade May Be Best

Shares of the distinguished sportswear company Lululemon (LULU) has taken a hit lately, with the stock losing 55% of its value year to date. The company faces margin pressures from tariffs and shifts in the supply chain, while consumer demand weakens as shoppers turn to lower-priced alternatives.

With Lululemon stock trading below its 50-day and 200-day moving averages, investors may consider a bearish call spread to take advantage of further potential weakness in the stock.

In a bear call spread, an investor sells a call option while purchasing another call option with a higher strike price. With Lululemon shares trading around 168, investors could consider selling the 165 call and buying the 175 call, both expiring on December 19.

This trade can currently be entered for a balance of about $4.50 per share, which also represents the maximum profit of $450 per 100-share contract if the shares trade below 165 at expiration.

The maximum loss is the difference between the strike prices minus the credit received, calculated as $10 minus $4.50, then multiply that by 100. The result is $550. Investors will realize this maximum loss if the stock trades above 175 at expiration.

Lululemon Stock: Earnings on the way

This setting creates an almost equal reward profile. With limited risk, it provides a balanced way to bet against a stock compared to shorting a stock outright.

A risk-specific strategy is especially useful for a stock like Lululemon, which has already seen sharp declines. While momentum remains weak, any positive earnings surprise or improvement in the outlook could send shares rising quickly.

A big moment for this trade will come when Lululemon reports third-quarter earnings on December 4. Analysts expect earnings per share to be $2.21, down 23% from a year earlier, despite revenue rising 3% to $2.48 billion.

Calling past earnings reactions volatile would be an understatement. The stock is down roughly 14%, 19%, and 18% after its last three earnings reports.

Lululemon currently has an IBD Composite Rating of 46. After hitting a low of 159.25 in early September, shares have trended slightly higher. However, they are still below both major moving averages.

Stephen Bell is a writer and trader based in Vancouver, British Columbia. He is the author of IBD’s “Income Investor” column, which focuses on insight into low-risk, under-followed stocks.

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