• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Investing With Options

Become a Better Options Trader

The Coming Options Squeeze in Lululemon

December 9, 2010 By Steven Place

seriously, why would you short these?
seriously, why would you short these?

Mind the Gap

$LULU reported earnings last night, and the price reaction was solid, with the stock moving up nearly 6 points from the close. This stock has the potential to squeeze higher, due to it's large short interest, but also due to the options board.

The chart above is the risk profile of the Dec 55 straddle sale. At the close yesterday this was "at the money," meaning this strike was closest to where the stock was trading. The closing price for this straddle was $4.95. That means the options market was pricing in a $5 move between Wednesday and next Friday. We are currently trading well above that upside line. The option market got it wrong.

The Volatility Squeeze

So just like stock shorts are forced to cover, any option trader who sold volatility into earnings will be forced to cover. That means they will either buy stock as a hedge, or they will close out the short calls. If the latter case happens, the market makers will keep implied volatility elevated due to the increased demand for options, and the MMs will also buy stock to make the trade. This option cover will bring extra demand to the stock, which can lead to great upside results.

For a recent example of how a squeeze can be fueled by option shorts, check out CRM post earnings.

If you want to learn how to analyze and trade earnings events, check out my video course over at EarningsTrades.com.

Free Iron Condor Toolkit

Want to learn how to beat the market without needing to time the market?

Do you desire a way to earn aggressive returns without staring at screens for six hours a day?

Get this free iron condor toolkit that will show you how this trade works in the real world.

Download the Toolkit Here

Primary Sidebar

Resources


Option Trading Basics
Income Trading

Recent Posts

  • How I Profited From A One-Day Pullback In Tech Stocks
  • 3 Option Trades for CCIV
  • Time to Call a Top in Solar
  • Winning In Both Directions
  • Big Water, Small Hose

Get The Options Trading Training You Need.

See All IWO Trading Courses!

© 2017 InvestingWithOptions | Disclaimer | Financial Disclaimer | Terms and Conditions | Privacy Policy