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Put Credit Spread on Cree Inc. (CREE)

Play CREE's move up with a put credit spread


What happens to a company’s stock when its earnings and guidance top expectations? The answer to that question is normally the stock moves higher. Here is a trade idea on a stock that looks strong well into the future or in this case at least until February expiration.

Cree Inc. (NASDAQ:CREE) Put Credit Spread

The trade:  Sell February 38/40 Put Credit Spread (selling the February 40 put and buying the February 38 put) for 45 cents or better.

The strategy: The maximum potential profit for this trade is 45 cents if CREE is trading above $40 at February expiration. The maximum loss is $1.55 ($2 – 45 cents) if CREE is trading below $38 at February expiration.  Breakeven is $39.55 at expiration based on a 45-cent credit.

The rationale: Cree Inc. develops and manufactures LED products, lighting products and semiconductor products for power and radio-frequency applications. The stock has struggled over the last couple of years but since October of last year, the stock has been trending higher. The company announced earnings this week and surprised investors. Earnings per share almost doubled to $0.18 and the company sees strong demand for its new products. The stock subsequently gapped up almost $8.

After the strong move higher, the stock was able to maintain a level in the top one third of the previous day’s breakout bar which is considered a bullish sign. Just because a stock gaps higher doesn’t mean it necessarily has to move lower again. The stock has no resistance until about $44 which is a previous pivot level (prior high). Consider exiting the position if the stock closes below $40.

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