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Cree, Inc. (CREE) Bulls Turn a Blind Eye to Technical Troubles

Cree, Inc. short sellers may be hedging with long calls

by 6/16/2014 10:23 AM
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Call players have been notably active in Cree, Inc.'s (NASDAQ:CREE) options pits of late. During the course of the past two weeks, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 15.81 calls for each put. What's more, the resultant call/put volume ratio ranks higher than all other similar readings taken in the past year, meaning long calls have been initiated over long puts with more rapidity now than at any other time within the last 12 months.

This trend was witnessed on Friday, when calls changed hands at more than seven times the daily rate, and outpaced puts by a 7-to-1 margin. Short-term options were in high demand, per CREE's 30-day at-the-money implied volatility (IV), which shot 14.5% higher to 33.6%. The most active strike was CREE's July 52.50 call, where 6,558 contracts changed hands -- mostly at the ask price, pointing to buyer-driven activity. IV jumped 5.9 percentage points, and open interest rose the most of any CREE strike over the weekend, making it safe to assume new positions were initiated.

The out-of-the-money calls were purchased for a volume-weighted average price (VWAP) of $0.84, making breakeven at the close on Friday, July 18 -- when the options expire -- $53.34 (strike plus VWAP). Gains are theoretically unlimited with each step above this mark CREE is sitting, while losses are capped at 100% of the premium paid, should the stock be perched south of the strike at expiration. Considering CREE hasn't seen the north side of $52.50 since taking an earnings-induced tumble in late April, delta for the call is docked at 0.33, suggesting a 1-in-3 chance the option will enjoy an in-the-money finish.

This bullish positioning toward a stock that's down 21% year-to-date to trade at $49.18 is a bit surprising. Meanwhile, although unsubstantiated takeover chatter on Friday sent CREE to its first daily close north of its 50-day moving average since March 20, the stock has surrendered this perch in today's session. Given the equity's withstanding technical troubles -- and a short-interest-to-float ratio of 10% -- a portion of the recent call activity could be a result of short sellers hedging against any unexpected upside.

Regardless of the motive, Cree, Inc.'s (NASDAQ:CREE) speculators can rest easy knowing they're scooping up short-term options at a bargain. Specifically, the equity's Schaeffer's Volatility Index (SVI) of 35% ranks lower than 83% of similar readings taken in the past year. In other words, premium on CREE's near-term options is relatively affordable at the moment.


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