Chart of the Day: $CREE Goin Cray

by Dan December 23, 2014 12:47 pm • Chart of the Day• Commentary

LED – Light Emitting Diodes, thats what CREE makes… right you have no idea what they are either. Well, the first time I heard of this company was back in the day of candy bar phones and an analyst who I was speaking with said, you see that blue light on your Nokia screen that illuminates in the background, that’s what CREE does.   Got it!

0343groupon_8250

Earlier this morning I was alerted to come call buying in CREE, a stock, whose options have not hit my radar in a very long time. What stuck me though was that they were short dated, so much so that they don’t even catch the company’s scheduled fiscal Q2 report on Jan 20th.

Specifically there has been an opening buyer of more than 5000 Jan 33 calls with the two largest blocks, a buy of 1250 for 1.41 when stock was 33.21 and then a buy of 1350 for 1.47 when stock was 33.21 twenty mins later at 10:09 am. Generally traders would look at long premium directional trades that capture a scheduled event as this helps to keep options prices bid.  In this situation the trader is eyeing an event that is unknown to the public or could very simply looking for long exposure for a defined period of time without a care in the world with what happens after Jan expiration.  Regular readers know we place very little emphasis on unusual options activity as a standalone trading strategy, but we do think it can be used as an important input on the sentiment front when evaluating a trade (read our post on the topic from February – Unusual Options Activity: Why it Can Matter & Why it Usually Doesn’t).

In this case I was not looking at the stock, and now I am.  SO what do I see?  Some meaty in the money premium that does NOT catch a scheduled event and could see some rapid decay over the holiday shortened trading weeks and expected low vol period between now and New Years Eve.  So could this be a hedge against a short position, sure, but just as if it were a short term bullish bet, the premium at about 4.4% of the strike is notable.   For whatever reason for the purchase, (protect a short or make a short term bullish play) one would generally need a certain level of conviction to justify the premium paid.

Taking a closer look at the stock, it has gotten battered in 2014, down 47%, has high short interest at 17.50% of the float. But more than a quarter of its $4 billion market cap in cash and no debt.  Oh, and Wall Street HATES the stock with 3 Buys, 16 Holds and 2 Sell ratings with an average 12 month price target of $32.23, below where it is trading.

Despite declining earnings and sales that are only supposed to grow 2%, in the current fiscal year the once high flier, trading at 34x this years expected earnings doesn’t seem that out of whack, especially in this M&A environment.

From a technical standpoint, the stock might have put in a double bottom at $30, with no real overheard for at least another 10%, with the next massive resistance at the prior breakdown level of $44/45, which also corresponds with the stock’s 200 day moving average, the stock could act like a coiled spring on the slightest bit of good news:

CREE 1yr chart from Bloomberg
CREE 1yr chart from Bloomberg

Options prices are jacked, with 30 day at the money implied vol about 53% nearing the pre-earnings levels.  But in a name like this, if buying begets buying, 53% could soon be deemed cheap:

CREE 1yr chart of 30 day at the money IV from Bloomberg
CREE 1yr chart of 30 day at the money IV from Bloomberg

On the Jan 33 call strike, IV is up 10% on today’s buying:

CREE Jan 33 calls IV from Bloomberg
CREE Jan 33 calls IV from Bloomberg

So do you chase a stock or its options on day like today? I think not if your only reason is that others are out there buying.  But I do think it makes sense to dig a little deeper into the story, as this input alone is interesting but should not be the main reason to follow someone else into the trade without any knowledge of their intent.  I am also not a fan of buying a stock like this up 10% in a short period of time, I would be much more inclined to do some work, let the situation settle a bit, and make less emotional entry.

But make no mistake, the stock is oversold, hated, with high short interest, clean balance sheet, and a market cap small enough to be an easy tuck in for any large component supplier. And yes the options flows suggests someone is committing capital to higher prices in the very near term.   CREE has caught my attention.