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Athleisure Maintains Its Appeal as a Product and a Trading Opportunity

Athleisure Maintains Its Appeal as a Product and a Trading Opportunity

It wasn’t that long ago that the clothing category of athleisure was invented.

Athleisure is defined as “a trend in fashion in which clothing designed for workouts and other athletic activities is worn in other settings, such as at the workplace, at school, or at other casual or social occasions.

Athleisure outfits are yoga pants, tights, sneakers, leggings and shorts, that “look like athletic wear” and are characterized as “fashionable, dressed up sweats and exercise clothing”.

The idea is that gym clothes are supposedly making their way out of the gym and becoming a larger part of people’s everyday wardrobes. Athleisure can be considered as a fashion industry movement, enabled by improved textile materials, which allow sportswear to be more versatile, comfortable, and fashionable.”

The term dates back to at least March 1979 when it appeared in an issue of Nation’s Business:

“The booming popularity of fitness has given birth to a similar boom in apparel and footwear designed for those who actually participate in sports — and those who just want to look as if they do…. ”

The whole athleisure (a new term that has popped up) market is in a state of tremendous growth,” says John Gehbauer, the [Sporting Goods Manufacturers Association’s] director of advertising and promotion.”

But, Merriam-Webster notes the term became ubiquitous around 2015.

This Might Be the Company Leading the Trend

For many investors, one company represents the trend and the stock of that company is on the move again.

Bloomberg reported, “Lululemon Athletica Inc. Nasdaq: LULU) rose the most in more than four months after the yogawear company boosted its quarterly sales and profit forecast ahead of the ICR Conference in Orlando this week.

The move follows a series of holiday sales misses last week and prompted a chorus of praise from analysts.

“In what is turning out to be a more mixed holiday for retailers, we view these results as industry leading,” a MKM Partners analyst wrote.

The company said comparable-store sales increased in the high-single to low-double digits for the current quarter, which ends Feb. 3. Lululemon also sees total sales and adjusted profit coming in higher than its previous forecasts.

Here’s what Wall Street is saying:

Stifel, Jim Duffy

Lululemon’s guidance for stronger-than-anticipated holiday season stands out in the retail sector and highlights “continued brand resonance and execution through the important holiday season.” Duffy is “impressed by the magnitude of the upside” indicated by the pre-announcement.

Wedbush, Jen Redding

Lululemon is an “impressive growth story” with compelling fundamentals that include “a strong e-commerce segment with meaningful growth ahead, and international expansion opportunities.”

The company’s investments in data analytics and digital marketing will contribute to product margins in the long-term.

MKM Partners, Roxanne Meyer

The compares “are more favorable than expected.”

Lululemon’s results reflect “the strength of product, technology initiatives, and management execution.”

The results also likely show growth in e-commerce in the mid-40 percent range, making it 26 percent of total sales for the year.”

This seems to be having a short term impact on the stock.

LULU daily chart

And, the recent gains could mark a reversal in the long run.

LULU weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying LULU could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for LULU

For LULU, the February 15 options allow a trader to gain exposure to the stock.

A February 15 $145 call option can be bought for about $5.90 and the February 15 $150 call could be sold for about $3.90. This trade would cost $2 to open, or $200 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $200.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in LULU the maximum gain is $3.00 ($150 – $145 = $5.00; $5.00 – $2.00 = $3.00). This represents $300 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $200 to open this trade.

That is a potential gain of about 150% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.