Cypress Semiconductor Corp (CY) $8.64 +1.17%

Cypress Semi (CY) is up 9 cents to $8.63 and options volume is running 2X the average daily levels. 21K contracts traded and call volume represents 81 percent of the volume. Looks like sellers are dominating the flow in July 8, July 9 and Sep 9 calls, with more than 90 percent of the volume trading bid-side. All three contracts have volume exceeding open interest, suggesting opening call writes on the chipmaker. Implied volatility eased to 46, from about 53 the day before, and comes as the co. presents at a Cowen & Co. Tech Conference today. Amtech raised estimates and price target yesterday on strengthening orders across a range of products.

Given the upbeat broker comments today, some of the call sales might be part of over-writing strategies or buy-writes on Cypress. That is, investors are taking positions in CY shares (where volume is running 1.25x the normal) and selling calls. In the traditional buy-write, 1 call is sold for every 100 shares. For example, assuming July 9 calls (today’s most actives) are being sold for 50 cents against shares at $8.70, the strategist is actually paying $8.20 per share ($8.70 – .5) and has upside to $9 (the strike price), or 9.75 percent, through the July expiration 50 days. For if the stock moves to $9 or more, the calls will be assigned and the strategist asked to sell shares at that price.

$8.20 becomes the downside breakeven and if shares fall below that level through the expiration, the trade loses money. If the stock moves towards $9, but not beyond, the calls will expire worthless and the strategist can 1) close the position or 2) sell calls in more distant expiration month (August).

Category: Buy-Write, Semiconductors