Semiconductor materials concern Cree Inc. (
) has attracted considerable attention from the options crowd
today. Call options are the contracts of choice, with some 15,000
of these typically bullish options changing hands, more than
doubling CREE's daily average call volume. The most popular strike
on the session, so far, is the September 57.50 call, where more
than 6,000 contracts have traded on open interest of 4,557
contracts, hinting that much of this activity likely represents the
initiation of new positions.
While most investors were focused on the Sept. 57.50 call, there
was a more interesting trade that took place on the September 55
and 52.50 put strikes. Specifically, a block of 500 September 55
puts traded for the ask price of $1.38, or $138 per contract, at
about 9:41 a.m. Eastern time on the Philadelphia Stock Exchange
(PHLX), suggesting that these contracts were bought to open. At the
same time, a block of 500 September 52.50 puts traded for the bid
price of $0.66, or $66 per contract, suggesting that the contracts
were sold to open. Both blocks were also marked "spread." Given
this data, it appears that the trader opened a vertical put spread,
, on Cree Inc.
The Anatomy of a Cree Inc. Vertical Put Spread
Breaking down this debit spread position, the trader purchased
500 September 55 puts for the ask price of $1.38, resulting in a
debit of $69,000 -- (1.38 * 100) * 500 = $69,000. In the absence of
the premium received by selling the September 52.50 put, the trader
would need CREE to drop roughly 5% from Friday's close at $56.50,
to $53.64 per share, in order for the position to reach breakeven
at expiration. Furthermore, the maximum loss on this leg of the
position is limited to the initial investment of $69,000.
As you can see, the second leg of the debit spread helps to
offset the cost of the overall position. In this case, the trader
sold 500 September 52.50 puts for the bid price of $0.66, netting a
total credit of $33,000 -- (0.66 * 100) * 500 = $33,000. Combining
this leg of the trade with the purchased September 55 put lowers
the total cost of the entire position to $36,000 -- $69,000 -
$33,000 = $36,000.
After the vertical put spread has been established, rising
implied volatility is pretty much neutral to the overall position,
as it lifts the value of both the sold option and the purchased
option. At the time of the trade, implieds for the September 55 put
arrived at 54.36%, while the implied volatility for the September
52.50 put came in at 56.23%. For a point of reference, CREE's
one-month historical volatility was 63.60% as of the close of
trading on Friday.
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