Opportunity: Trade This Stock’s Drop

Ulta Beauty Inc (NASDAQ:ULTA) stock has had a rough 12-month period. However in 2018 and coming into this earnings report, it had been making a comeback, up 7% year-to-date. Compare this with the overall market being flat for the same period.

Last night, ULTA reported earnings and is suffering a setback as investors react negatively to the headline. Traders are selling the stock down in a knee-jerk reaction even though management delivered a strong beat.

But as the story goes these days, the forward guidance was muted so Wall Street hit the sell buttons without even caring about the health of the quarter.

And therein lies the opportunity.

I believe that short-term concerns are unwarranted. ULTA management being conservative is a good thing, especially that we are facing global war concerns in a rising rate environment.

A cautious management team is doing the right thing.

This will turn out to be a case of under-promise and over-deliver next quarter.

This is a stock that has a history of excellence.

Yet it is still about 20% off its all-time highs. At one point, it could do no wrong as it turned incredible comp sales performances. It was also known to be immune to the threat from Amazon.com, Inc. (NASDAQ:AMZN).

However, Ulta carries a high ticket price, so I don’t want to risk my money buying the shares outright without any room for error. So I use ULTA options to bet on proven support rather than upside hopium. In other words, I have more confidence that there is value in it against which I can sell risk for income. In essence I am betting that Wall Street fears are overblown.

Technically ULTA stock has important trend lines to hold. $220 per share is one that stands out to me. It also happens to be a pivot point that dates back to May of last year. If the bulls lose it then there could be more downside from there. However long-term, I believe that owning these shares at such a severe discount would have a positive outcome in the long run.

Today’s drop in ULTA brings the stock into a zone that has been pivotal for two years. Those tend be supportive on the way down. Neither bulls nor bears want to lose it without a fight.

NFLX Stock Trade Idea
The Trade: Sell the ULTA Dec $160 put for $2. Here I have a 90% theoretical chance of success. Otherwise and if the price falls below it then I would suffer losses below $158.

Selling naked puts carries big risk, especially for a stock as frothy as ULTA. For those who want to mitigate it, they can sell a spread instead.

The Alternate Trade: Sell the ULTA Dec $170/$165 bull put spread, which has about the same odds of winning and would yield 12% on risk. Compare this with risking $245 per share here and without any room for error expect a rally profit.

— Nicolas Chahine

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Source: Investor Place