by John Kmiecik | September 19, 2013 6:00 am
Now that the FOMC meeting is officially over, traders and investors — many of whom were waiting until after the conclusion to pounce — can get back to business.
Here is a trade idea to get you back into the swing of things.
The trade: Sell the Oct 55/57.5 Put Credit Spread (selling the Oct 57.5 put and buying the Oct 55 put) for 50 cents or better.
The strategy: The maximum potential profit for this trade is 50 cents if CREE is trading above $57.50 at October expiration. The maximum loss is $2 ($2.50 – $0.50) if CREE is trading below $55 at October expiration. Breakeven is $57 at expiration based on a credit of 50 cents.
The rationale: Cree is a company that specializes in LED lighting, and it is looking to dominate the market. Cree believes that its LED light bulbs will create huge savings for consumers and businesses alike because of the product’s longevity despite the greater initial outlay of cash. Just last month, Cree announced a drop in earnings and offered soft Q1 guidance. Still, the company is debt-free, and it has about $1 billion in cash and short-term equivalents on the balance sheet, with earnings still expected to rise at a good clip.
Click to Enlarge Since the decline after earnings, CREE has been struggling to move higher again, and in particular, it was having difficulty moving above a resistance area (prior pivots) around $60 until Wednesday. Now there is a decent chance that previous resistance can act as potential support.
Also, for the last several sessions before the potential breakout, the stock had not wandered below $58, which might now as a support area too.
An options trade with two potential areas of support is something worth shining a little light on!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.
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