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Cree, Inc. (CREE) Earnings Reaction May Have Option Sellers on Edge

Cree, Inc. is poised for a post-earnings plunge following last night's results

by 4/23/2014 9:28 AM
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Option Brief: Cree, Inc. (NASDAQ:CREE) option activity was accelerated on both the call and the put sides yesterday, as traders prepared for the semiconductor concern's turn in the earnings confessional last night. By the numbers, roughly 30,000 calls and 22,000 puts changed hands -- about three and four times the respective daily average. Diving deeper reveals that a number of these speculators strayed from traditional option strategies -- opting to sell calls and puts to bet on a near-term ceiling and floor, respectively.

On the call side, the June 60 strike was in focus, where 2,411 contracts changed hands. Almost all of these calls traded at the bid price, and open interest rose overnight, hinting at the initiation of new short positions. By writing the calls to open, the expectation is for CREE to remain south of $60 through the close on Friday, June 20. This would allow the contracts to expire worthless, and the speculators to pocket the initial credit collected as their full potential reward.

Meanwhile, receiving notable attention on the put side was CREE's weekly 4/25 51 strike, with 2,390 contracts hitting the tape yesterday. Although these puts traded primarily between the bid and the ask price, open interest rose the most of any strike overnight, and data from the International Securities Exchange (ISE) confirms that at least some of the options were sold to open. By writing the puts, the traders' goal is for CREE to maintain its perch atop $51 through this Friday's close, when the weekly options expire. As with the short-call strategy, the maximum potential reward for this play is limited to the initial cash collected.

Technically speaking, outside of a couple of pops higher in January, the equity has spent 2014 churning between $54 and $64, translating into a year-to-date decline of 7.2%. However, these losses are most likely going to steepen today, with CREE down more than 7.3% in pre-market trading following last night's earnings results.

Specifically, although beating on the bottom line, CREE's fiscal third-quarter revenue missed the mark, and the company offered up a tepid outlook for the current quarter. The news was followed by a mixed reaction from the brokerage bunch, with Canaccord Genuity raising its price target by $3 to $77, and Sterne Agee slashing its price target by $11 to $65. Both brokerage firms maintained a "buy" rating for Cree, Inc. (NASDAQ:CREE). Ahead of the open, the equity was perched at $58.05.


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