Quick Turnaround Banks Cree Options Bulls a 200% Profit

An excessive amount of pessimism was priced into CREE stock

Nov 2, 2017 at 11:24 AM
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Subscribers to Schaeffer's Weekly Options Countdown service just tripled their money in two short days on our Cree, Inc. (NASDAQ:CREE) weekly 11/3 31.50-strike call recommendation. Here's a closer look at what put CREE stock on our bullish radar, and how the options trade we recommended on Sunday, Oct. 29, unfolded.

Despite reporting relatively lackluster third-quarter earnings in mid-October, CREE ripped higher -- surging 16.4% in the subsequent session -- signaling excessive pessimism was priced into the shares. After breaking out to new highs, the stock pulled back to the $32 region, near its October 2016 highs, a level that had previously served as resistance but appeared to be switching to a more supportive role. Plus, the equity was up an impressive 24% year-to-date.

In spite of this positive technical backdrop, options traders were unusually skeptical toward the stock. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), CREE's 10-day put/call volume ratio of 1.34 ranked higher than 81% of all comparable readings taken in the past year -- meaning puts had been bought to open over calls at a faster-than-usual clip. A capitulation from some of the weaker bearish hands could create tailwinds for the shares.

Additionally, it was an attractive time to purchase premium on short-term CREE options, per the security's Schaeffer's Volatility Index (SVI) of 29%, which ranked in the 13th annual percentile. In other words, lower-than-usual volatility expectations were being priced into near-term contracts. Not to mention, Cree has historically rewarded premium buyers over the past year, as evidenced by the stock's high Schaeffer's Volatility Scorecard (SVS) reading of 96.

Cree rallied sharply on Monday and Tuesday this week, boosted by broad-based strength in the tech sector. CREE shares topped out at a two-year high of $37.43 in early action on Tuesday, allowing us to close our position at a 200% profit.

cree stock 10 minute price chart


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