Option Activity Alert: Lululemon Athletica, Iron Mountain

LULU – Lululemon Athletica, Inc. – Shares of the yoga clothing and accessories maker stretched and lengthened up to new all-time highs yet again today, attracting bullish options players more than willing to flex their call-buying muscles in the December and January 2011 contracts. LULU’s shares jumped more than 8.95% to secure an intraday- and new all-time high of $69.25 in the final thirty minutes of the trading week. The Canadian company’s shares have been unstoppable, rallying an incredible 167.5% to today’s high from a 52-week low of $25.75 on February 5, 2010. Shares are up 1,490.8% since March 6, 2009, when the stock touched down at an all time low of $4.33 a share at around the same time the S&P 500 Index hit rock-bottom in the most recent economic recession. Investors unwilling to stand in the way of such a driving force picked up call options on Lululemon to position for additional share price gains going forward. Traders purchased some 1,100 in-the-money calls at the December $65 strike for an average premium of $2.67 each. Call buyers at this strike profit if LULU’s shares exceed the average breakeven price of $67.67 through December expiration. Other bullish players sold roughly 1,650 puts at the December $65 strike to pocket premium of $1.08 per contract. Put sellers keep the full premium received on the transaction as long as shares trade above $65.00 through expiration in one week. Investors short the puts are happy to have shares of the underlying stock put to them at an average price of $63.92 a share in the event that the puts land in-the-money at expiration. Bullish players skipped to the January 2011 contract to purchase out-of-the-money calls, as well. Investors bought more than 1,000 January 2011 $70 strike calls for an average premium of $2.21 each. Uber-bullish players picked up another 2,000 calls at the higher January 2011 $75 strike at an average premium of $1.19 a-pop. Call buyers at this strike are poised to profit should shares in LULU surge 10.0% over today’s high of $69.25 to surpass the average breakeven price of $76.19 by expiration day next month. Options implied volatility on LULU is up 23.4% at 51.79% heading into the close.

IRM – Iron Mountain, Inc. – A three-legged bullish options combination play on Iron Mountain today indicates one strategist is positioning for shares of the provider of information management services to climb higher ahead of July 2011 expiration. Iron Mountain’s shares are currently up 0.75% to arrive at $23.48 as of 1:55 pm in New York. The investor lowered the cost of obtaining upside exposure through a long stance in out-of-the-money calls by selling a put spread. The optimistic individual sold 10,000 calls at the July 2011 $22.5 strike for a premium of $1.80 each, purchased 10,000 puts at the lower July 2011 $20 strike for an average premium of $0.925, and picked up 10,000 calls at the July 2011 $25 strike at a premium of $1.50 a-pop. Net premium paid to initiate the spread amounts to $0.625 per contract, thus preparing the trader to make money if Iron Mountain’s shares surge 9.135% over the current price of $23.48 to surpass the effective breakeven point at $25.625 by expiration day in July. Selling the credit put spread substantially lowered the breakeven point to $25.625 from the breakeven of $26.50 the trader would have faced had he simply purchased the calls outright instead. But, the cost savings come with a potential price should shares in IRM move against the investor. The party responsible for the transaction could wind up losing as much as $0.875 per contract on the put spread if shares plunge 14.8% to trade below $20.00 by expiration day. Of course, if shares are down around $20.00 ahead of July expiration, the calls are then set to expire worthless and their full cost of $1.50 per contract plus the loss of $0.875 per contract on the put spread combines for maximum potential losses of $2.375 per contract on the trade. The three-legged bull, however, has weighed such risk and decided it is worth his while given the unlimited upside potential gained in the process.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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