Lululemon stock has had a rough year thus far, plunging 56%. The slide deepened Friday after the company reported disappointing second-quarter earnings and sharply lowered its sales forecast.
For the second quarter in a row, the premium athletic apparel brand cut its full-year outlook. Management now expects revenue of $10.85 billion to $11 billion, down from a prior range of $11.15 billion to $11.30 billion. The company also sees earnings per share falling from $14.64 in 2024 to $13.23 this year.
Lululemon has been hit hard by tariffs and is struggling to maintain its once-strong consumer appeal. The government's recent removal of the exemption of tariffs on small packages was also cited as a big headwind driving higher costs.
With the stock in a prolonged downtrend — trading below both its 50-day line and the 200-day moving average — investors looking to capitalize on further weakness might consider a bear put spread.
Constructing The Bear Put Spread On Lululemon Stock
With a bear put spread, an investor buys a put option while also selling a lower-strike put option. In the case of Lululemon, investors can consider a bear put spread. Here, investors buy a 160 put and sell the 150 put on the Oct. 17 expiration.
This trade currently goes for a debit of around $3.60 a share, based on recent trading. This also coincides with the maximum loss of $360 an investor will experience on a 100-share contract if shares are above 160 on expiration.
Calculate the maximum profit via the width of the strikes minus the debit paid. In this case take $10 minus $3.60, then multiply that by 100. The result is $640. Investors will realize this maximum profit if shares of Lululemon trade below 150 on expiration.
Unlike shorting shares, using a bear put spread limits the risk to the debit paid, allowing investors superior risk management. The caveat is that due to higher transaction costs, option spreads are usually only suitable on highly liquid stocks.
Lululemon stock currently trades at a new five-year low. Investor's Business Daily gives the stock a weak Composite Rating of 48 out of a best-possible 99. Its Relative Strength Rating stands at just 4 on a scale of 1 to 99.
Steven Bell is a writer and trader based out of Vancouver, British Columbia He is the author of IBD's Income Investor column, focused on shedding insight on low-risk, underfollowed stocks.
