Using options to trade two cosmetics competitors with a lot on the line this month

e.l.f. Beauty and Estée Lauder are well-known companies in the beauty and cosmetics industry. Still, they differ significantly across various dimensions, such as customer base, price points, and geographic reach. We’ll discuss options trades in both and a pairs trade to do together. e.l.f. (which stands for “Eyes, Lips, Face”) targets a younger, budget-conscious consumer demographic. Many of its customers are Gen Z and Millennials, who appreciate the brand’s affordability and accessibility. e.l.f. also attracts consumers interested in “clean beauty,” offering vegan and cruelty-free products. e.l.f. is known for its direct-to-consumer model, leveraging e-commerce as a primary channel alongside partnerships with retailers like Target, Walmart, and Ulta. By contrast, Estée Lauder’s core customers skew older, with Gen X and Millennials making up a significant portion of its base. Their customers generally have higher disposable incomes, as Estée Lauder is a luxury brand emphasizing premium, high-quality ingredients. The brand appeals to consumers seeking prestige products and is often associated with anti-aging solutions. Estée Lauder combines a traditional retail model with a growing e-commerce presence. It partners with high-end department stores like Macy’s, Nordstrom, and Sephora and operates an extensive network of standalone stores worldwide. The company also invests significantly in digital transformation to meet the demands of online shoppers. The difference is consistent with the significant difference in product price points. Positioned as an affordable brand, e.l.f. offers products priced from $3 to $15 for most items. Its strategy focuses on delivering value and accessibility, enabling customers to purchase high-quality cosmetics without a premium price tag. In contrast, Estée Lauder is firmly positioned in the luxury segment, with prices for items often starting at around $40 and going upwards of $200, especially for skincare products. This premium pricing aligns with its focus on luxury ingredients, sophisticated branding, and high-end retail partnerships. While e.l.f. started primarily in the U.S. market, it has been expanding globally, leveraging e-commerce to reach international customers. However, its distribution is still predominantly in North America. The United States represents nearly 85% of total revenues. Estée Lauder has a much larger global footprint, with a well-established presence in Asia at just over 31% of revenues in Europe, slightly more than 39%, and in the Americas, with just under 30% of total sales. Serving different demographics has led to very different operating results in recent years. While Estee Lauder has struggled to maintain revenues, e.l.f. has grown the topline sharply over the past five years. One might expect that the higher price point of Estee’s offerings would lead to fatter profit margins, and while they did achieve wider margins at their peak a few years ago, their margins have fallen even as e.l.f.’s profit margins have improved. Better topline growth and steadier margins, presumably e.l.f. must trade at a significant premium to Estee? No, both are trading at about 30 times forward earnings estimates. So, how might one trade this dynamic? The trade One could get long e.l.f., but the challenge is that despite the nearly 50% decline since mid-July, technical weakness persists in both these stocks. Estee Lauder has fallen roughly 45% over the past seven months. ELF EL YTD mountain Estee Lauder vs. elf Beauty, YTD e.l.f. beauty also relies on China for manufacturing, which may present a tariff risk depending on the outcome of the election. (Former President and current Republican Presidential candidate Trump has proposed sharply increasing tariffs on Chinese imports). Therefore, the week ending November 8th is a big one for e.l.f. with the election on the 5th and earnings on the 6th. A lower-risk way to make a bullish bet is with a call spread such as the $115/$135. That $20 call spread costs 5% of the current stock price as/of Friday’s closing prices. Trade example : Buy ELF $115 Nov. 8 call Sell ELF $135 Nov. 8 call Estee is less vulnerable to tariffs, but earnings do present a risk. The stock has not performed well recently, falling after seven of the last eight quarterly earnings releases. Suppose one wanted to make a bearish bet as a pair trade against a long e.l.f. trade, one could consider selling an upside call spread in Estee, where a credit spread would help offset the decay. Trade example : Sell EL $90 Nov. 15 call Buy EL $95 Nov. 15 call Note that the share price of e.l.f. is 26% higher than that of EL, so the notional exposure of one long elf call spread vs one short EL call spread does not offset one another perfectly. 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