Potential Play In Lululemon Following Breakout?

As stocks continue to push high and higher into the stratosphere, there are fewer and fewer stocks that present high value risk / reward setups on the long side.

Finding stocks that are demonstrating good basing patterns is harder to find than the remaining two bears that are left to short this market. Lululemon LULU is one such stock that is putting in a nice base and has recently broken out.

Looking at the chart below, you can see that the stock put in a high in mid-September of $45.50. With the stock now trading $46.94 it has cleared that prior high and could be set for a shot at the April 2014 high of $55.

Either way, $45.50 seems to be the key support level for now, so with this knowledge, a trader could set up a high probability options trade.

Implied volatility is current above 50 percent which is the higher end of the range for the last 12 months, so short volatility would be the way to go here.

Here's a potential trade setup example:

Date: November 24, 2014

Current Price: $46.94

Trade Set Up:

Sell 10 LULU December 19, 45 puts @ $1.75

Buy 10 LULU December 19, 42.5 puts @ $0.97

Premium: $780 Net Credit.

The total risk in the trade is $1,720 and total potential profit is limited to the $780 credit received. If LULU finishes above $45 at the December 19 expiry, that's a 45 percent return on capital at risk.

Keep in mind that earnings are on December 11 and this stock has a history of making huge moves after earnings releases.