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Cree, Inc. (CREE): Short-Term Traders Zero In On Calls

Cree, Inc. call volume currently triples the intraday average

by 3/17/2014 3:09 PM
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Calls are the contracts of choice in Cree, Inc.'s (NASDAQ:CREE) options pits today, with volume tripling the typical intraday rate. So far, 21,000 calls have crossed the tape. The majority have done so at two strikes, as speculators employ different strategies to gamble on CREE's short-term prospects.

Most active is the March 63.50 call, which expires at the closing bell this Friday. More than 10,700 contracts -- including blocks of 5,524 and 4,026 -- have traded here, and implied volatility (IV) has ticked higher, suggesting new positions have been created. However, the vast majority of the contracts went off at the bid price, hinting at sell-to-open activity. In other words, these traders are skeptical that CREE -- now hovering at $60.31 -- will make its way north of $63.50 by week's end.

By contrast, nearly 5,400 contracts are on the tape at the April 65 call, and the majority appear to have been bought to open, as 95% traded at the ask price, volume outstrips open interest, and IV is on the rise. To put matters differently, these option bulls anticipate CREE will move above $65 by the close on Thursday, April 17, when these back-month options expire.

Whereas the April 65 call buyers have limited risk for their bullish bets -- that is, they will lose no more than the initial premium paid, even if their calls expire out of the money -- the March 63.50 call writers have more on the line. Specifically, if shares of the semiconductor name rally beyond the strike price, the sellers may be assigned, and on the hook to deliver the shares at $63.50 each, no matter how much they're worth. In other words, risk on a short (uncovered) call position is theoretically unlimited.

Taking a step back, today's penchant for Cree, Inc. (NASDAQ:CREE) calls over puts is business as usual. During the last 10 sessions at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a call/put volume ratio of 4.27, with more than four calls bought to open for every put. This ratio also ranks higher than 85% of comparable figures from the last year, meaning traders have been picking up long calls (over puts) at a faster-than-usual pace, relatively speaking.


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