Cree Inc. (
) 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.
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 (
) 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
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
, on Cree Inc.
The Anatomy of a Cree Inc. Vertical Put Spread
Breaking down this vertical put spread, the trader would have
purchased 2,500 November 57.50 puts for a total outlay of roughly
$1.33 million -- (5.34 * 100) * 2,500 = $1,335,000. The second leg
of the debit spread helps to offset the cost of the overall
position. Specifically, the trader sold 2,500 November 45 puts for
a total credit of $247,500 -- (0.99 * 100) * 2,500 = $247,500.
Combining this leg of the trade with the purchased November 57.50
put lowers the total cost of the entire position to about $1.09
million -- $1,335,000 - $247,500 = $1,087,500.
The addition of the sold November 45 put also lowers breakeven
on the trade. To arrive at breakeven, we subtract the credit
received from the sold November 45 put from the debit incurred by
purchasing the November 57.50 put. Doing so, we arrive at a cost of
$4.35- $5.34 - $0.99 = $4.35 -- or $435 per contract. As a result,
breakeven for the position rests at $53.15 per share, with the
trader now needing CREE to fall roughly 5.1% from its current perch
The maximum profit on the long vertical put spread is calculated
by subtracting the total debit paid from the difference between the
sold November 45 strike and the purchased November 57.50 strike. In
this case, the maximum profit is $8.15 -- (57.50 - 45) - 4.35 =
$8.15 -- and is reached if CREE drops to $45 per share when the
options expire. Below is a chart for a rough visual representation
of the trade's profit/loss scenario:
After the vertical put spread has been entered, increasing
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 November 45 put
were 72.74%, while the implied volatility for the November 57.50
put was 67.61%. For comparison, CREE's one-month historical
volatility was perched at 35.77% as of the close on Wednesday.
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