Cree, Inc. (CREE) Option Bulls Play the Buyout Buzz

Cree, Inc. (CREE) calls are active amid reports of more General Electric Company (GE) takeover chatter

May 11, 2015 at 11:12 AM
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LED issue Cree, Inc. (NASDAQ:CREE) is up 2.5% at $31.12, and calls are flying off the shelves amid what some media outlets attribute to another round of takeover chatter involving General Electric Company (NYSE:GE). CREE's 30-day at-the-money implied volatility has surged 12.1% to 32.4%, and calls are trading at five times the average intraday clip, outnumbering puts by a margin of more than 4-to-1. 

Digging deeper, speculators are circling May calls, which expire at Friday's closing bell. Specifically, buy-to-open action has been spotted at the May 30, 31, and 31.50 calls. By purchasing the contracts to open, the buyers expect CREE to leave the strikes in the dust by the end of the week. Risk, meanwhile, is limited to the initial premium paid for the calls, should they expire out of the money.

On the charts, it's been a rocky road for CREE since the company's mid-April earnings report. The shares just hit a six-month closing low of $29.30 last Wednesday, and their 14-day Relative Strength Index (RSI) now sits at 33 -- on the cusp of oversold territory. Today, the stock is attempting to surmount its 10-day moving average for the first time since April 21.

Meanwhile, short interest accounts for 16.6% of CREE's total available float, and would take 12 sessions to buy back, at the stock's average pace of trading. Some of those bears may have been adding long calls to hedge their positions, though. 

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Cree, Inc.'s (NASDAQ:CREE) 10-day call/put volume ratio of 2.48 ranks in the 71st percentile of its annual range, pointing to a healthier-than-usual appetite for calls over puts of late. What's more, peak call open interest in the front-month series sits at the deep out-of-the-money May 37.50 strike, underscoring our theory of potential hedging.


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