LED / diode-semi specialist Cree (CREE) is in the unusual option activity spotlight in front of tonight’s earnings release. With shares up 4% in front of the report, the company's OTM April 30 and 28 puts are trading heavily on combined volume of about 15,000 contracts which has easily topped existing open interest. Dissecting prints, it appears a trader has opened a vertical 5,000 times for roughly $0.46 on five seperate but sequential block prints.
With shares at 32.25, the spread's breakeven of about 29.25 is roughly 9% below current prices and near key support. Technically, CREE has spent the better part of the last three months in a sometimes bumpy, but mostly lateral consolidation of about 15% after staging a weekly breakout from a downtrend of more than a year in length.
At the same time, help from our wave-based pal PS Elliott suggests a less healthy period of technical digestion as a daily Wave 5 and weekly Wave 4 EBOT have triggered in recent weeks. As it takes two sides to consummate a trade and generally those parties taking opposing views, our best guesstimate regarding the fore-mentioned spread is a bull initiated what we see as a smarter money, targeted purchase.
Figure 1: Cree (CREE) April 30 / 28 BPS x 5000
Shown above is a bull put spread risk graph using Tuesday’s very big money positioning to illustrate. As many option traders know, selling a naked put is often referred to as a targeted purchase when the trader expresses his or her intention of accepting assignment, should shares drop below the sold strike, rather than simply looking to collect premium. But with that strategy’s only true stop loss theoretically and once in a blue (LED) moon, being $0.00 in shares; we like the idea of seeing the bull put spread as a smarter targeted purchase strategy. In the end, the trader collects less premium, but can accept long stock. More importantly, if push comes to shove, the strategist also maintains a guaranteed exit that’s more than simply in their mind and most certainly well-removed from $0.00.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.