This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Terry

Will Lululemon Athletica (LULU) Continue to Gain After Breaking to a Record High?

LULU has posted some impressive gains as of late and these two analysts see more upside – Why Lululemon’s Digital Business Is So Profitable and 3 Top Stocks to Buy for the Week.

The stock gapped up after their earnings report in late March, breaking to a fresh record high.  Since then, LULU has essentially traded sideways with dips to horizontal support near $164 bought up.  The horizontal level is quite significant as it represents resistance that held the stock lower last year.  More support is found from the 20-day moving average which is seen converging towards the horizontal level.

LULU Chart April 2019 Vertical Spread

LULU Chart April 2019

If you agree there’s further upside ahead for LULU, consider this trade which is a bet that the stock will continue to advance over the next six weeks, at least a little.

Buy To Open LULU 31MAY19 167.50 Puts (LULU190531P167.50)
Sell To Open LULU 31MAY19 170 Puts (LULU190531P170) for a credit of $0.80 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when LULU was trading near $169.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $77.50 and your broker would charge a $250 maintenance fee, making your investment $172.50 ($250 – $77.50).  If LULU closes at any price above $170 on May 31, both options would expire worthless, and your return on the spread would be 45% (421% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates April 18, 2019 Terry's Tips

IBD Underlying Updates April 18, 2019

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

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