Sunday, February 19, 2012


Hi Folks,

I feel like now is a good time to short LULU. This is a bit of a longer term trade rather than a day trade. I am looking to do this through options. I am looking at the March 62.5 puts. In doing this I am getting the right to sell LULU stock at 62.5 before the 3rd Friday in March. My target is $55 in LULU stock. The stock is currently selling at $65. I am hoping to buy these at $1.75. 1 option contract is equal to 100 shares so, if I buy 1 LULU March 62.5 put at $1.75, my cost would be $175(100 shares x 1.75). My breakeven point on this trade is for LULU stock to be trading at or below $60.75(62.5 strike - 1.75= 60.75). If LULU gets to my target of $55 before March expiration, the option would be worth $7.5.

If you own LULU stock and want to keep the stock but want to buy yourself some protection from a sell off in the stock, you could "collar" the position with options. You could sell a call and buy a put with the proceeds from the sale of the call. Here is an example. You own 1000 shares of LULU stock now trading at $65. To protect yourself from a sell off you could sell 10 June 67.5 calls for $5.80 and use that money to buy 10 June 62.5 puts for $5.80. 10 contracts x 100 shares = 1000 shares which is how many shares you currently own. So if the stock is trading at $55 at June expiration, the calls you sold are worthless and the puts you bought are worth $7.50 and you still own the stock.

Thanks and Good Trading,


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