Friday, October 15, 2010

"Betting Against Cree Inc. Ahead of Earnings" (CREE)

From Schaeffer's Research:

Options trader hedges a bearish pre-earnings bet on CREE
Cree Inc. (CREE) is scheduled to release its quarterly earnings report after the close of trading on Oct. 19. Analysts are currently looking for a profit of 58 cents per share from the firm, more than doubling Cree's profit of 25 cents per share in the same quarter last year. Historically, the company has bested Wall Street's expectations in each of the prior four reporting periods, with an average upside surprise of nearly 22%.
Technically speaking, the stock has rebounded off its September lows, but has run smack into resistance in the $57-$58 region. CREE has not closed a session above this area since late August.

Daily chart of CREE since August 2010

Overall, CREE's options volume was heavily call-centric today, with more than 9,000 of these bullishly oriented contracts changing hands so far, more than doubling the stock's daily average. The most popular strike on the session has been CREE's October 55 call, where about 2,400 contracts have traded.

Looking past the soon-to-expire October series, we find that the most active November options are the 45 and 57.50 puts. While taking a closer look at this volume, I stumbled across what appears to be a bearish debit spread on CREE. Specifically, a block of 2,500 November 45 contracts, marked "spread," traded on the Chicago Board Options Exchange (CBOE) at 11:13 a.m. Eastern for the bid price of $0.99, or $99 per contract, indicating that the contracts were most likely sold to open.

The second leg of this position was found on the November 57.50 put, as a block of 2,500 contracts traded at the same time on the same exchange for the ask price of $5.34, or $534 per contract. This block, too, was marked "spread." Given this data, we could be looking at the initiation of a vertical put spread, or a debit spread, on Cree Inc....MUCH MORE