Lululemon Athletica Inc. (LULU:US)put volume (LULU:US) surged to a record the day before the yoga-wear retailer issued a disappointing earnings estimate, giving one trader a paper profit of $2.42 million.
More than 64,000 bearish contracts traded on June 6, hours before the company said sales and profit would trail analyst forecasts. An investor bought 10,000 June $67.50 puts and sold the same number of June $60 puts, according to OptionsHawk.com and Trade Alert LLC. The position cost about $1.3 million and was worth $3.72 million as of yesterday’s close, up 186 percent, data compiled by Bloomberg show.
Lululemon’s 8.8 percent decline (LULU:US) yesterday was the biggest since August. Before the report, the Vancouver-based seller of products such as $118 yoga pants traded (LULU:US) for 51 times reported earnings, almost three times as much as the Standard & Poor’s 500 Index. The stock retreated at least 4.6 percent following two of its previous three quarterly reports.
“The trade in Lululemon was clearly a well-timed strategy into earnings,” Joe Kunkle, founder of Boston-based OptionsHawk.com, said in an e-mail yesterday. “Although the natural reaction is to jump to the conclusion that this was insider trading, to me it was just a well-executed trade, and provided a nice tell to those of us that follow large institutional trades in the options market.”
Sari Martin, an external spokeswoman for Lululemon, declined to comment on the options trading.
Tiffany & Co. (TIF:US), the world’s second-largest luxury jewelry retailer, declined the most in four months on May 24 after cutting its full-year profit and sales forecasts as smaller Wall Street bonuses and restrained spending from European tourists hurt sales growth in the U.S.
That concern wasn’t reflected in analyst projections prior to the earnings release from Lululemon, which made 54 percent of its sales (LULU:US) in the U.S. during the last fiscal year. The company’s revenue has more than doubled in the past two years as its workout apparel attracted customers willing to pay premium prices for its products.
The average analyst estimates (LULU:US) for Lululemon’s full-year revenue and profit have been almost unchanged since the end of March at $1.35 billion and $1.63 a share, respectively, according to data compiled by Bloomberg.
“Drop a guidance bomb into a market not in love with luxury names, no matter if you normally guide conservatively, your stock will get smashed,” Brian Sozzi, an independent analyst in New York, wrote in a note published yesterday after the earnings report. He recommended on May 23 that investors sell the stock, which is also his current rating. “I would still follow the suggestion given pre-earnings on Lululemon, avoid the stock.”
The $1.3 million options trade turned profitable after Lululemon said yesterday that this year’s profit will be no more than $1.60 a share, less than the average of 24 analyst estimates (LULU:US) compiled by Bloomberg. Revenue for the year will total as much as $1.34 billion, also trailing the average of analysts’ estimates.
The shares had gained 50 percent in 2012 to $70.02 through June 6. The company closed at $63.84 yesterday.
The trader spent $1.81 million for 10,000 June $67.50 puts by 11:30 a.m New York time on June 6, giving the right to sell Lululemon shares at that price, according to Trade Alert, a New York-based provider of options-market data. The investor then sold 10,000 June $60 puts for about $510,000, the data show. Buying a spread rather than simply purchasing put options cuts the cost of the trade while capping the potential profit.
The price of the June $67.50 put option soared to $4.30 yesterday, while the June $60 contract closed at 58 cents, data compiled by Bloomberg show. The value of the spread trade was $3.72, which is equivalent to a profit of $2.42 per spread or $2.42 million in total if the trader exited the position yesterday.
“It was a very short-term bearish trade, probably on concerns about the earnings report,” Frederic Ruffy, a senior options strategist at WhatsTrading.com, said in a phone interview yesterday. “It can either have been initiated to hedge a stock position or as a straight bearish bet.”
Put volume jumped to a record (LULU:US) 64,758 on June 6, almost eight times more than the average for the previous 20 trading days and almost three times the number of calls, data compiled by Bloomberg show. The six contracts that changed hands the most were puts, led by June $67.50 puts and June $60 puts. Ownership of June $67.50 puts increased by 12,276 contracts, while June $60 puts gained 11,903 contracts, the data show.
Bullish Lululemon options had some of the biggest losses in the U.S. stock options market yesterday, with June $72.50 calls expiring today tumbling to 1 cent from $1.96 on June 6. Weekly June $70 calls plunged to 2 cents from $3.15, while June $67.50 calls fell to 4 cents from $4.60, the data show.
The Chicago Board Options Exchange Volatility Index, known as the VIX (VIX), slipped 2 percent to 21.72 yesterday. Its European counterpart, the VStoxx Index, a measure of Euro Stoxx 50 Index option prices, rose 0.3 percent to 31.53 at 9:57 a.m. in Frankfurt today.
Options traders have been boosting bearish bets. Since its March 23 low, the ratio of outstanding puts to sell Lululemon versus calls to buy climbed (LULU:US) 84 percent to 1.07-to-1 on June 5, according to data compiled by Bloomberg.
“Props to the buyer of the large put-spread on Lululemon,” Caitlin Duffy, an options analyst at Greenwich, Connecticut-based Interactive Brokers Group Inc., said via e- mail yesterday. “The sharp pullback in shares of the athletic apparel retailer on full-year earnings and revenue forecasts that missed consensus estimates saw the value of the bearish spread spike.”
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