Put Buyers Flock To LULU Stock Ahead Of Earnings

Although earnings season has all but wrapped up, there are still a few stragglers who have yet to step up to the plate. One such company is athleisure retailer Lululemon Athletica inc. (NASDAQ:LULU), which reports earnings after the close tomorrow. Below, we will take a look at the yoga wear maker, and examine how options traders are analysts are playing LULU stock ahead of earnings.

While LULU shares have a mixed history of post-earnings price action -- finishing the subsequent session higher in five of the past eight quarters -- the moves have been substantial. Over the past eight quarters, LULU stock has averaged a single-session post-earnings move of 12.1%, including a 15% surge this time last year, as well as a 23% slide last March. This time around, the options market is pricing in a larger-than-usual next-day swing of 16%, regardless of direction, based on at-the-money implied volatility data.

Many of those dramatic earnings reactions can be seen on the chart below. Lululemon stock has been choppy since touching its 2016 peak, with Fibonacci retracement levels coming into play. Currently, LULU stock is flirting with a 38.2% Fibonacci retracement of its rally from2015 lows to the 2016 peak, encroaching on an area that contained its advances in late 2016 and earlier this year. The shares have successfully filled the aforementioned March bear gap, though, and have rallied more than 41% since their late-May low, last seen at $66.45, down 1.1% on the day.

Ahead of earnings, analystsremain split over LULU. Of the 25 brokerages covering the athleisure stock, 11 rate the shares a "hold" or "strong sell." Furthermore, Canaccord Genuity today reiterated its "sell" recommendation. "[W]hile we see the likeliehood of a Q3 EPS beat, we continue to see mounting evidence" of a shift from athletic apparel toward denim, the analysts said, citing comments from recent retailers including Abercrombie & Fitch Co. (NYSE:ANF) and Gap Inc (NYSE:GPS).

Recent options buyers are heavily put-skewed toward LULU. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Lululemon's 10-day put/call volume ratio of 2.28 ranks 1 percentage point from a 52-week high. In other words, speculators have been initiating bearish LULU bets over bullish at a near annual-high clip in the past two weeks.

Digging deeper, the December 65 put has seen the biggest rise in open interest during the past 10 days, with over 6,100 contracts added. It appears most of the puts were bought to open, and will move into the money if Lululemon stock breaches $65 in the next couple of weeks.