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Traders Bet on a Short-Term Breather for Cree, Inc. (CREE)

CREE's March 45 put is seeing buy-to-open activity today

by 2/7/2013 2:42 PM
Stocks quoted in this article:

Cree, Inc. (NASDAQ:CREE - 44.53) is trading lower today, after the semiconductor concern tagged a new annual high of $44.72 on Wednesday. The modest pullback isn't going unnoticed by option traders, who are placing bearishly slanted bets at an accelerated clip. Around 12,000 puts have crossed the tape so far, more than doubling the average intraday volume. By comparison, fewer than 4,500 calls have changed hands.

CREE's March 45 put has emerged as the most active strike on the day. Of the roughly 6,250 contracts that have traded, 95% have crossed at the ask price, implied volatility was last seen 3.1 percentage points higher, and only 905 positions currently make up open interest here. In other words, it appears new bullish positions are being initiated.

In order for these in-the-money puts to be profitable by expiration, CREE needs to slide 4.9% below current levels by the close on Friday, March 15. A move of this magnitude would cause the shares to breach the breakeven mark at $42.37 (strike less the volume-weighted average price of $2.63).

Today's bearishly skewed bias just highlights the withstanding trend seen in the options pits in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 12,259 puts, versus 7,711 calls, during the past 10 sessions. This put/call volume ratio of 1.59 ranks in the 97th percentile of its annual range, indicating puts have been scooped up over calls with more rapidity just 3% of the time within the last year.

This rush toward puts is a bit puzzling, considering the stock has been a solid outperformer lately, besting the broader S&P 500 Index (SPX) by more than 34 percentage points throughout the past 20 sessions. Additionally, CREE has rallied more than 31% higher since the beginning of the year, helped in large part by its 22% earnings-induced pop on Jan. 23.

As mentioned, though, the equity has pulled back today, and was last seen down 0.3% to trade at $44.53. Should the stock fail to fall below the $42.37 mark by March expiration, the most today's put buyers stand to lose is the initial premium paid. With implied volatility at this strike currently deflated relative to CREE's 40-day historical (realized) volatility (37% vs. 56.7%), these traders can rest easy, knowing the premium they ponied up was priced relatively inexpensive.


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