Options Trade of the Day: A Cree Inc. Vertical Put Spread


Shutterstock photo

Semiconductor materials concern Cree Inc. ( CREE ) 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, or debit spread , on Cree Inc.

CREE option volume details

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.

CREE vertical put spread

CREE profit loss chart

Implied Volatility

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.

Click here for the new summer issue of SENTIMENT magazine

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.

This article appears in: Investing , Options

More from Schaeffer's Investment Research


Schaeffer's Investment Research

Schaeffer's Investment Research

Market News
Follow on:

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by BankRate.com