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Lulu Short-Sellers Got Their Payday, and You Could Be Next

Stocks in this article: LULUCOHTIFAPPL

International expansion is rarely cheap, and for luxury brands, it's expensive. It's a testament to Lulu's leadership that they are able to grow their base and the bottom line simultaneously. The short-sellers have the best of it right now, but the ground is shifting under their feet. The panic selling will subside within a day or two, setting up a buying opportunity.

The rule on the street is that it takes three days of selling to wash and rinse out all the weak hands. The first event is a gap lower, followed by two days of unrelenting selling. It's a painful process, but if you have the patience and composure to watch it play out, late Wednesday or Thursday offers the best risk/reward ratio, based on historical norms.

When the news is a one-time event, such as the departure of a CEO, a recovery tends to proceed ever faster. Based on this information, scaling in later Wednesday compared to waiting until late in the day Thursday and or Friday, may give better results.


I wouldn't be the risk-hedging advocate I'm known as if I didn't mention writing put options as a strategy. Selling puts allows you to capture a slice of the market fear while lowering your overall risk. Starting late Wednesday, if Lulu shares continue declining, look to sell $60 strike September puts. Investors can lower the total risk of exposure by 15%. At the current option premium price of $2.42, your downside risk is reduced to $57.58 a share and as long as Lulu is trading above $60 on expiration day, you can expect a 4% gain on your capital in about three months.

If Lulu does fall below $60 and you're exercised, you can decide if you want to keep the shares (and possibly write call options against your stock), or close out the position. As you can see, your potential loss using options is much lower than if you had bought the shares outright.

If you want exact entry and exit points with timing, be sure to watch my Real Money Pro feed as I update my thoughts in in real time.

At the time of publication, the author held no position in any stock mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Robert Weinstein currently blogs, mentors traders, and writes several weekly columns in Rocco Pendola's Option Investing newsletter from his home in northern Wisconsin. Robert tends to focus on the psychological importance of goals, risk mitigation, emotion, and relatively short term market exposure. With nearly 30 years of studying and investing experience, Robert has experienced the many ups and downs in the financial markets and uses the knowledge gained to maintain balance. Robert believes the best way to make money investing is to avoid losing it. The best way to avoid losing is to know what emotional traps lay in the path of investors and learning how to avoid them. Robert is a voracious reader of financial related books often completing more than one book a week while not trading or writing. Robert contributes to his blog at paid2trade.com on a regular basis with an emphasis on studying behavior finance.


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