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Put sellers pounced on Cirrus Logic, Inc. (NASDAQ:CRUS - 39.76) on Friday, with neutral-to-bullish traders exploiting pre-earnings option premiums. By the time the dust settled, CRUS had seen roughly 6,800 puts change hands -- more than double its average daily put volume.
Most popular was the November 39 put, which saw roughly 2,000 contracts traded on fewer than 1,100 contracts, pointing to newly initiated positions. Plus, the majority of the puts crossed at the bid price, underscoring our theory of sell-to-open activity. By writing the puts to open, the sellers are expecting CRUS to remain north of $39 through options expiration. In this best-case scenario, the puts will remain out of the money, and the sellers can retain the entire premium received at initiation.
As alluded to earlier, CRUS' short-term option premiums are relatively expensive at the moment. The equity's Schaeffer's Volatility Index (SVI) has marched steadily higher heading into tonight's scheduled report (as of publication time, the company hasn't indicated whether Hurricane Sandy will impact its earnings release), and now stands at 82% -- above 84% of all other readings of the past year. In other words, near-term options are in high demand right now, making now an opportune time to sell premium.
Technically speaking, the shares of CRUS have outperformed the broader S&P 500 Index (SPX) by more than eight percentage points during the past 20 sessions. In fact, the stock touched a record high of $45.49 just over a month ago. Nevertheless, not everyone on Wall Street is a fan of CRUS. Short interest accounts for more than 10% of the equity's total available float, representing about four sessions' worth of pent-up buying demand, at the stock's average pace of trading.
From an historical standpoint, CRUS has bested analysts' bottom-line earnings estimates in each of the past four quarters, Thomson Reuters reports. Another positive earnings surprise could spook the shorts, leading to a short-covering bump for the stock.