Every earnings season there are inevitably a few grenades being lobbed around that end up wreaking havoc on the charts of companies who dare disappoint the denizens of the Street. Today’s casualty is Cree Inc. (CREE), which cratered some 20% on the heels of discouraging first-quarter EPS guidance that came in lower than analysts’ expectations.
With shares of the lighting products developer going dim, some might be wondering whether CREE’s best days are behind it. While the answer to such a thought remains hidden, some profit opportunities are being uncovered amid today’s wreckage.
Before today’s destruction, Cree stock was up a barn-burning 124% in 2013. So you needn’t mourn for shareholders that have owned the stock for a while. Although the downside plunge breached multiple support levels — including the 50-day moving average on the daily chart — Cree stock’s weekly chart remains firmly entrenched in an uptrend leading, some to contend this might be a buying opportunity for long-term investors.
When a stock experiences a volatile earnings gap that transports it into no-man’s land, predicting its next move is usually nothing more than a coin flip. Fortunately, we can tap into the versatility of options to structure a position providing a healthy margin of error in case CREE decides to misbehave.
If you think the selling frenzy is a bit overdone and CREE is more likely to stabilize or rebound than continue plunging into the abyss, selling an out-of-the-money (OTM) bull put spread is a trade worth consideration.
By using OTM options you can structure a put spread with a high probability of profit — garnering gains whether Cree stock rises, moves sideways, or even drops a bit more. Plus, if demand for options ebbs in the coming weeks as things settle down, the put spread will accumulate profits even quicker.
With CREE sitting around $60.50, you could sell the Sep 55-50 put spread by selling the Sep 55 put and buying the Sep 50 put for around 73 cents. The max profit is limited to the initial credit and will be captured provided the stock sits above $55 at expiration. The max loss is limited to the distance between strikes minus the net credit, or $4.27, and will be incurred if Cree stock resides below $50 at expiration. To minimize the risk, consider exiting if CREE breaks convincingly below the short put strike of $55.
In timing your entry, I strongly suggest waiting for signs that CREE is bottoming. Thus far today, the price decline has continued unabated. Wait for at least an intraday uptrend to take root or for the stock to break above a prior day’s high.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
