How We Scored Huge Profits With Cirrus Logic Options In Less Than 3 Days

Sentiment was overly bullish on Cirrus Logic, Inc. (NASDAQ:CRUS), which had just gapped lower after earnings

Mar 3, 2017 at 9:36 AM
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Subscribers to Schaeffer's Weekly Options Countdown service just scored a 100% profit thanks to our recommended weekly 3/3 56.50-strike put on Cirrus Logic, Inc. (NASDAQ:CRUS). Below, we go back to illustrate what initially drew us to CRUS shares, while also showing how the options trade unfolded. 

CRUS landed on our bearish radar after the shares suffered a major post-earnings bear gap in early February. What was especially noteworthy about this was that the company posted stronger-than-expected quarterly revenue, yet the stock still fell, suggesting sentiment had grown too bullish. For starters, we noticed the vast majority of covering analysts recommended buying the stock, while the shares also had a 10-day call/put volume ratio above 3.00 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- meaning more than three times as many calls had been purchased than puts. 

Going off this, there was a huge accumulation of call open interest at the 55 strike in the March series. Also, the stock was in the midst of a bear flag pattern, and we noticed it had struggled to overcome its year-to-date breakeven level, pointing to a strong level of technical resistance. Not to mention, CRUS' Schaeffer's Volatility Index (SVI) was just 2 percentage points from an annual low at the time, so volatility expectations were unusually low.

Since CRUS obviously had failed to live up to Wall Street's bullish billing, we felt the stock could struggle as some of the bullish sentiment began to unwind.  Sure enough, Oppenheimer downgraded Cirrus Logic shares to "perform" from "outperform" the night of Feb. 28, and the next day the stock fell to as low as $52, even as the broader equities market rallied to record highs

crus stock chart

 

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