ULTA play on big post-earnings drop

[Yowster]

ULTA dropped over 20% today post-earnings.  I'm looking for a short-term trade to play for a little more downside but don't want to lose if it bounces back a little.  I'm looking at a Dec20 1x2 put spread where I'd buy one 92.5 put and sell two 90 puts and collecting a credit somewhere in the 0.70 to 0.90 range (could be bolder and use the 95/92.5 and collect in the 1.25 to 1.50 range).

 

If ULTA goes up from here, you could just keep the initial credit.  If ULTA goes down, the sweet spot is 90 where the spread would be worth 2.50 at expiration plus the initial credit.  Break-even is 87.50 minus whatever the initial credit is (a drop of approx 8% from where the price currently is).  Trade does have a margin requirement as one of the short puts would not be covered.

[Kim]

Unless you have Portfolio margin, the potential return on margin is pretty low - unless the stock is at exactly 90 at expiration. And if it goes lower, you actually lose money - unless you wait till 2-3 days before expiration. 

[indiana*josh]

Unless you have Portfolio margin, the potential return on margin is pretty low - unless the stock is at exactly 90 at expiration. And if it goes lower, you actually lose money - unless you wait till 2-3 days before expiration. 

 

Is there a position that might accomplish the same goal without huge margin requirements?

[Kim]

You can sell 1 92.5 put and buy 2 90 puts (similar to what I did with SPY), but you will pay a debit, not get a credit like SPY and the downside is higher if the stock reverses.

 

Another option is doing a calendar (short December long January) and this I really like. The cost is only 1.05-1.10 and the risk seems pretty low. 

[jr1221]

ever consider adding a calendar trade like that to our portfolio?  There are many stocks that fall into a trading range shortly after earnings, and often remain in that range for quite some time.  Plus IV is low.  Seems pretty good upside and low risk.

[Kim]

Yes, I was actually considering it. Stay tuned..

[Kim]

Okay, just checked it - ULTA is not liquid enough for us to play it and the spreads are pretty wide. But if you can get the calendar around 1.10, I think it represents an excellent opportunity.

 

As for other plays - I actually did a similar trade with IBM, but the stock became very volatile after earnings, requiring too many adjustments. But I will always look for similar opportunities, and if you spot one, please let me know.

[Yowster]

Unless you have Portfolio margin, the potential return on margin is pretty low - unless the stock is at exactly 90 at expiration. And if it goes lower, you actually lose money - unless you wait till 2-3 days before expiration. 

 Margin requirement for ULTA short put is 20%.  I opened this trade for 0.90 credit and my margin requirement shows as $1710 for each 1x2.   That $90 credit represent a 5.2% return on margin.  If the stock settles into the 90 to 92.5 range then a return in the 10% to 15% range is quite possible.  These returns are in the same range as what we're looking for with the pre-earnings straddles (but admittedly does have more risk if ULTA drops into the mid 80's over the next few weeks).

[Kim]

Did anyone trade the calendar when I mentioned it at 1.10? The mid is 1.70 now.

[jr1221]

I did not.  Congrats to anyone who did.  I wonder if a similar play might come up with LULU once it finds its bottom. 

[cathval2]

I did trade the calendar - I actually did a double calendar 90/95. Closed out today for aprox 27% profit. How do we find more of these!!