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March 15, 2013  Fri 2:45 AM CT

ULTA: SEE CHART GET CHAIN FIND STRATEGIES
Ulta Salon drew bearish option activity leading up to its earnings report last night.  

optionMONSTER systems show that trader bought 4,000 April 80 puts for $1.50 and sold the same number of April 95 calls for the same price. The previous open interest at each strike was around 1,000, so this is a new combination trade.

This is a zero-cost position, as the credit from the call sale exactly covers the cost of the puts, though there are commission costs and margin requirements. Although this could be an outright bearish play, it seems more likely that it is a protective collar on a long stock position. (See our Education section for other hedging strategies.)

ULTA ended the regular session up 1 percent at $88.37 but plummeted more than 14 percent to $75.85 in post-market trading after issuing guidance below analysts' expectations. Shares of the cosmetics and fragrance company have been bouncing between $85 and $100 for more than a year.

More than 42,500 ULTA options yesterday, compared to a daily average of 2,454 in the last month. 
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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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