Ulta Beauty Inc (NASDAQ:ULTA) has been a nightmare for short sellers, much like Amazon.com Inc (NASDAQ:AMZN). Those two top my list of tickers that I don’t short. I don’t sell calls or credit call spreads against them either.
It is said that price is truth. In the case of Ulta Salon, the stock price is heading higher. From the trend, it would seem that the long trade is easy.
But for most traders, it’s tricky to enter such momentum, as it seems like a perpetual missed opportunity. At every moment in time, ULTA stock appears overextended, thereby scaring most investors from chasing.
Fundamentally, ULTA has solid execution and a strong following on which it continues to build its business.
Click to Enlarge Technically, there is almost no perfect time of entry. Since the 2016 U.S. elections, Ulta made higher lows and has been knocking on the current levels. If the bulls break this roof, they could overshoot much higher. Earnings are coming so it could serve as the catalyst to trigger that breakout.
Depending on where you draw the line, one can argue that the breakout is already ongoing.
ULTA Stock Trade Idea
The Bet: Buy the ULTA Mar $280/$282.50 debit call spread. This is a bullish trade for which I pay 65 cents per contract to open. This is my maximum potential risk. If Ulta rallies past my spread, I stand to double my money.
I could modify this trade to be more of a real lotto ticket and go much higher in level. Then my spread would be much cheaper. However, I would then need a much bigger move to capture profits — so I could guess the correct direction of the move and still lose my money.
I usually like to reduce my out-of-pocket expense by selling downside risk against solid levels in ULTA. In this case, I could delay entry until after ULTA releases earnings.
The Bank (Optional): Sell ULTA Apr $220 put. This is a bullish trade for which I collect $1 per contract to open. By selling naked puts I commit to owning the stock if the price falls below $220. The 20% buffer from current price gives me a 90% theoretical chance of success.
Earnings events are binary in the short term and could cause anguish to some traders. So, I could limit the downside risk by substituting the sold put for a credit put spread. In either case, if the ULTA stock price stays above my sold downside risk, any premium I capture by selling my call position would be pure profit.
I am not obliged to hold any of my Ulta options trades through their expiration. I can close any of them for partial gains or losses at any time.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
