Thursday, June 21, 2012

Lululemon Athletica (LULU)- Depressed Vol in Moving Stock

LULU is trading $63.55, down 1.4 with IV30™ up 0.6%. The LIVEVOL® Pro Summary is below.


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I found this stock using a real-time custom scan. This one hunts for low vols.

Custom Scan Details
Stock Price GTE $10
IV30™ GTE 25
IV30™ Percentile LTE 10
IV30™ - HV20™ LTE -10
Average Option Volume GTE 1,200

The goal with this scan is to identify short-term implied vol (IV30™) that is depressed to the recent stock movement (HV20™) was well as its own history. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume) and minimum level of vol so the examination is more interesting.

The LULU Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

On the stock side, I have highlighted two gap moves in the last six months. The first occurred on 1-10-2012, when LULU went up from $53.44 to $59.87 in a day. The news surrounding that pop is included below:

What: Shares of yoga and fitness apparel designer lululemon athletica were stretching to the sky today, gaining as much as 16% in intraday trading after the company boosted its profit outlook.

So what: What's not to like when a company says that it made more profit than expected? For the fiscal fourth quarter -- which ends Jan. 29 -- Lululemon now expects that it will earn $0.47 to $0.49 per share on revenue of $358 million to $363 million. At the midpoint of the profit range, that is a 17% boost over the company's previous guidance. In its press release, CEO Christine Day noted that holiday sales were strong, but that the snappy sales performance is continuing as the company pushes its spring attire.

Source: The Motley Fool via Yahoo! Finance, lululemon athletica Shares Surged: What You Need to Know, written by Matt Koppenheffer.

That was the good news... More recently, on 6-7-2012, LULU released earnings and the reaction was... not so good. The stock dropped from $70.02 to $63.84. Here's a quick snippet from the earnings release:

Lululemon Athletica Inc.'s shares fell sharply Thursday, despite a 40 percent jump in first-quarter net income, as the fast-growing athletic clothing company offered a disappointing outlook.

There have been growing worries about a pullback in shopping by wealthy U.S. consumers who can afford $80 yoga pants, for example, underscored by a dim outlook by jewelry seller Tiffany & Co. last month. Lower spending by affluent consumers would hurt Lululemon's business.

The company said profit in the three months through April 29 rose to $46.6 million, or 32 cents per share, from $33.4 million, or 23 cents per share, a year ago.

Analysts polled by FactSet expected, on average, profit of 30 cents per share.

Source: AP via Yahoo! Finance; Lululemon 1Q profit jumps, outlook disappoints

So, demand was strong, but the outlook, not so much... On the vol side, we can see that the implied has been dipping since the earnings announcement, and quite substantially so. IV30™ is now depressed relative to both the short-term and long-term historical realized vols measures. The current vol comps are:

IV30™: 37.52%
HV20™: 49.24%
HV180™: 45.38%

Even further, the 52 wk range for IV30͐ is [32.62%, 84.96%], putting the current level in the 9th percentile (annual). For a clearer pictures of LULU IV30™, I've included a one year chart with just the IV30™, below.

Let's turn to the Skew tab to examine the line-by-line and month-to-month vols.

Note that the front two expiries are weekly options. I do find it a little odd that Aug is elevated to Jul (light blue is above the green). The next earnings release for LULU should be in early Sep -- so outside of the Aug option cycle. I'm guessing there are some sort of inter cycle sales figures released after Jul expiry but inside Aug and thus the elevated vol.

Finally, let's look to the Options Tab (below).

Across the top we can see that Jul is priced to 37.52% while Sep is priced to 40.82%. Again, that 38% (ish) vol in Jul is low relative to the last year and to the other historical realized vol measures.

This is trade analysis, not a recommendation.

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