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Cree Sees a Glut of Bearish Trading Activity


Downbeat brokerage note triggers put buying on CREE.

Cree, Inc. (NASDAQ:CREE) received some mixed analyst attention this morning, as Barclays raised its price target to $33 from $28, while Canaccord Genuity downgraded the stock to "hold" from "buy," and reduced its price target to $32 from $38. However, today's speculators seem to be focusing on the latter, as roughly 12,000 puts have changed hands as of 1:50 p.m. EST -- more than seven times the norm. By contrast, fewer than 7,200 calls have been traded.

Most active has been the February 35 put, which has seen north of 3,500 contracts change hands -- 88% of them at the ask price, suggesting they were bought. These in-the-money puts were exchanged at a volume-weighted average price (VWAP) of $3.20. Meanwhile, today's volume has exceeded current open interest levels, while implied volatility has ticked 4.8 percentage points higher -- indications of buy-to-open activity. In order for traders to realize a profit on their purchased puts, the stock must retreat below the breakeven rail of $31.80 (strike price less the VWAP) by the close on February 15, which is when these back-month options expire.

Today's uptick in short-term put volume flies in the face of CREE's current trend. The equity's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.36, with calls nearly tripling puts among the front three-months' series of options. This ratio is just two percentage points above a bullish yearly nadir, confirming near-term traders have rarely been more call-heavy toward the stock during the past year.

Prior to today's 5.7% decline, the LED specialist boasted a year-over-year gain of 53%. The stock has also outperformed the broader S&P 500 Index (INDEXSP:.INX) by nearly 37 percentage points during the past three months. In fact, the shares just tagged a new annual high of $35.12 on January 2. Given this technical strength, it remains to be seen if the equity will sink low enough by February expiration for today's traders to benefit from their bearish bets. Still, the most these skeptics stand to lose is the initial premium paid.

This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.

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