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Morning Update

Yesterday shares of Cree surged higher by nearly 15% after the company raised their forward guidance and announced the release of a new sub $10 energy efficient light bulb. One option trader made a bet that Cree’s future would not be that bright when he bought 9975 June 50 puts and sold an equal number of June 46 puts for a net cost of $1.86 and with the stock at 49.75. This is a bearish bet with a breakeven price of 48.14, 5.9% lower, at June expiration.

In Yesterday’s press release Cree said “Over the last couple of years we recognize that the consumer is instrumental in the adoption of LED lighting, but we need to give them a reason to switch.” Their new product, a $9.97 40-watt LED bulb, is what they hope will convince the consumer to ditch their old inefficient incandescent bulbs in favor of these. The new bulbs will be sold exclusively at Home Depot where a 60-watt incandescent bulb costs $13.97. It is well known that LED bulbs use less power and last longer, but they have always cost more up front. Now that Cree has changed that there is no reason for consumers to prefer incandescent bulbs to LEDs anymore.

On top of the new product announcement Cree revised their 3rd quarter guidance higher. They said that revue will be between $335 and $350 million, up from their January forecast of $325 to $345 million. They also upped their earnings estimates from $0.30 to $0.35 to $0.31 to $0.36 per share. Typically new products like Cree’s LED bulb take anywhere from 6-9 months to show up in earnings, so this large bearish trade could be to protect a “buy the rumor, sell the news” scenario in the stock. The shift from incandescent to LED bulbs should be slow but steady and is a big growth opportunity for Cree considering that in 2012 US consumers bought over 4 million light bulbs. This translates into a $14 billion revenue opportunity for Cree to capitalize on. Therefore I would not be betting against this company for the long term, although a fixed risk hedge like this makes sense for traders wanting to protect some of yesterday big gains in the stock.

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