Cash-Secured ELF Put Strategy: Capitalizing on Oversold Conditions

Market Update: April 23, 2025

This week presented a compelling opportunity for options traders as e.l.f. Beauty (NYSE: ELF) experienced significant downside volatility, creating an attractive entry point for put sellers. The stock has declined over 6% this week alone, adding to its dramatic 75% fall from 52-week highs, making it a prime target for premium capture strategies.

What Happened to ELF?

ELF shares have been under pressure since their Q3 2025 earnings report in February, when the company reduced guidance citing "softer than expected" sales trends. The cosmetics retailer saw a 36% drop in profits, and while revenue was still growing, the pace of growth has decelerated.

Adding to the pressure, the company faces two significant headwinds:

1. A class action lawsuit from stockholders alleging inflated revenue amid rising inventory (with a lead plaintiff deadline of May 5, 2025)
2. Concerns about potential tariff impacts on its supply chain, as approximately 80% of its products are manufactured in China

Why This Created an Options Opportunity

The severe correction has created an unusually high implied volatility environment for ELF options, with premiums expanding significantly. At the same time, several technical indicators suggest the stock may be approaching oversold conditions:

• The stock is testing long-term support levels
• Short interest has climbed to over 16% of float
• Some analysts are noting potential for a bullish divergence forming on the RSI indicator

Our Cash-Secured Put Strategy

This week, we initiated a cash-secured put position with the following parameters:

Trade Details:

• Underlying: e.l.f. Beauty (ELF)
• Strike Price: $50.00 (representing significant support from 2023)
• Expiration: May 16, 2025 (24 days until expiration)
• Premium Collected: $3.75 per contract
• Break-Even Price: $46.25
• Annualized Return If Assigned: 42.4%
• Margin Required: $5,000 per contract (cash-secured)

Risk Management Considerations

While this trade offers an attractive risk-reward profile, there are important factors to consider:

1. Earnings Risk: ELF's next earnings report is scheduled for May 21, 2025, after our option expiration, removing a significant uncertainty from the equation.

2. Position Sizing: Given the stock's heightened volatility (currently at 2.80% with a beta of 1.44), we're limiting this position to 3-5% of total portfolio value.

3. Adjustment Plan: If ELF drops below $48 before expiration, we'll consider rolling the position down and out to capture additional premium while reducing our cost basis.

The Fundamental Case

Despite its recent challenges, ELF's fundamentals remain relatively strong:

• The company still expects 27-28% revenue growth for fiscal 2025
• Profit margins remain healthy at approximately 7% of revenue
• The company continues to gain market share in the competitive cosmetics industry
• Current valuation is approaching more reasonable levels compared to its previous premium multiples

Analyst Perspective

Wall Street remains cautiously optimistic on ELF, with 22 Buy ratings and 19 Hold ratings. The average analyst price target sits at $85.62, representing significant upside from current levels, although many firms have recently reduced their targets.

Conclusion

While ELF faces near-term headwinds, the extreme reaction in share price has created an attractive options setup. By selling cash-secured puts at the $50 strike, we're positioning ourselves to either:

1. Collect a substantial premium if shares stabilize or recover
2. Potentially acquire shares at an effective cost basis of $46.25 (over 60% below the 52-week high)

Either outcome presents a favorable risk-reward proposition given the company's continued market share gains and growth, albeit at a slower pace than previously anticipated.

Disclaimer: This post is for informational purposes only and does not constitute investment advice. Options trading involves significant risk of loss and may not be suitable for all investors. Always conduct your own research and consider your financial situation before making any investment decision.