Options Action: Implied moves ahead of earnings for Dollar Tree and Lululemon

Key Concepts:

• Implied Volatility (Implied Vol): The market's expectation of how much a stock will move in the future.
• Volatility Crush (Vol Crush): The decrease in implied volatility that typically occurs after an earnings announcement.
• Calendar Call Spread: An options strategy involving buying and selling call options with different expiration dates but the same strike price.
• Risk Reversal: An options strategy that combines a short put and a long call, used to express a bullish view.
• Strangle: An options strategy that involves buying both a call and a put option on the same underlying asset with the same expiration date, but different strike prices.
• Optionality: The right, but not the obligation, to buy or sell an asset at a predetermined price and time.

Options Market Analysis and Strategy

• Worried Consumer Sentiment: The options market reflects concerns about consumer sentiment, as indicated by the implied moves for Dollar Tree and Lululemon.
• Implied Move for Dollar Tree: The options market is implying a move of approximately 11.5% for Dollar Tree.
• Implied Move for Lululemon: The options market is implying a move of approximately 9% for Lululemon.
• Lululemon Long Side Play: Mike Ko is inclined to play Lululemon from the long side based on valuation.

Specific Options Strategy for Lululemon

• Strategy Type: Calendar call spread risk reversal.
• Short Leg (May 2nd): Sell the May 2nd 285/380 Strangle. This involves selling both a 285 put and a 380 call expiring on May 2nd.
• Long Leg (July 3rd): Buy the July 3rd 330 calls.
• Rationale: This strategy aims to capitalize on the vol crush that is expected to occur after the earnings announcement. The short-dated options (May 2nd) will experience a decrease in implied volatility, while the longer-dated options (July 3rd) provide optionality and potential for upside.
• Vol Crush Explanation: Volatility tends to spike before earnings announcements and then decrease afterward. By selling the shorter-dated options, the trader benefits from this decrease in volatility.
• Optionality: By going out to the additional month, the trader is essentially long that call over a longer duration period of time.

Chart Interpretation

• The chart shows red and green bonds, representing the profit and loss potential of the options strategy.
• The strategy involves selling the shorter portion of the options, which will experience a vol spike into earnings and then come down.
• The trader is giving himself optionality by going out the additional month, which while his upside is capped on the short term he's essentially long that call over a longer duration period of time.

Conclusion

Mike Ko is suggesting a bullish options strategy for Lululemon, leveraging a calendar call spread risk reversal to profit from the expected vol crush after earnings. The strategy involves selling short-dated options to capture the volatility decrease and buying longer-dated options to maintain upside potential. The strategy is based on the expectation that Lululemon's valuation supports a long position.