A Better Long for LULU

With the overall market looking like it is at an intermediate term top, mini-revolutions sparking up all across the world, and oil prices pushing through the $100 per barrel level, you would be hard pressed to find a money manager that isn't buying up hedges and putting out some shorts. It is most important to do this when your long book consists of high-growth, make or break EPS names, such as Apple Inc. AAPL, Deckers Outdoor Corp. DECK, or Lululemon Athletica LULU. So, if you have been long names like these, you should be considering buying hedges that allow you to counter a market downturn. Better yet, if you have owned LULU for any period of time, it may be smarter to take your gains off the table and consider a stock replacement strategy. This would involve selling out of your stock position and then buying a long call position that mimics the upside potential of owning stock, without the massive potential loss. With shares currently testing the 50-day moving average and BofA/Merrill saying the stock is overvalued, it would be a smart move. In my opinion, the best way to do this is to purchase the April 2011 $75.00 call for a net debit of $4.85. Given that the strike is a mere 1.70% out-of-the-money, the delta on the option is relatively high, at 0.4881. The gamma of 0.0336 is also favorable. Also, as shares move, potentially, higher and above $75.00 the delta and gammas will grow, meaning that you will start to mimic the price appreciation of owning stock quicker than further out-of-the money strikes. By buying the $75.00 strikes you only leave 6.6% on your total position on the table; this means that if shares fail at the 50-day, your losses are dramatically minimized. Lululemon Athletica Inc. is a designer and retailer of technical athletic apparel primarily in North America. Its yoga-inspired apparel is marketed under the lululemon athletica brand name. The company offers a line of apparel and accessories, including fitness pants, shorts, tops and jackets designed for athletic pursuits, such as yoga, running and general fitness. As of January 31, 2010, its branded apparel was principally sold through 124 stores that are primarily located in Canada and the United States. As of January 31, 2010, its retail footprint included 45 stores in Canada, 70 stores in the United States and nine franchise stores in Australia.