Options investors bet on Cree rebound

* Earnings surprise could power rally in Cree

* June call options suggest gains

* Cree shares down 38 pct in 2011

By Angela Moon

NEW YORK, April 19 (Reuters) - Options investors are betting on a sharp surge in beaten-down Cree shares following the LED maker's earnings report after the bell.

Cree Inc (CREE.O) shares have lost nearly 38 percent on the year as investor enthusiasm waned. But better-than-expected numbers could turn the tide in the stock, and that could force the large contingent of short-sellers to cover their bets, boosting shares further.

"The market is telling us that there is a lot of short-term uncertainties in the stock," said Harry Rady, CEO and senior portfolio manager of Rady Asset Management in San Diego, California, who owns shares.

"If they (the earnings) disappoint, it's probably discounted in the stock price now. If it's even a little bit better than expected, prices could go up even 10 to 20 percent."

The stock was last trading at $40.89 a share. June call options have been active at the $45 strike price, a bullish bet on the shares.

Recent earnings revisions have been negative on the stock, especially after the bellwether LED maker cut its third-quarter revenue and margin forecast in late March due to higher customer investors and pricing pressure, signaling another disappointing quarter. For details, see [ID:nL3E7EN2BO]

According to Thomson Reuters StarMine, earnings estimates have been revised lower by 29.6 percent over the past 30 days, and revenue estimates are down 14.7 percent over the same period of time. The stock also scores very poorly in terms of price momentum as it has poor long- and medium-term momentum.

But the steady bets against the stock make it vulnerable to a short squeeze. More than 20 percent of the shares are being shorted and institutional ownership is high, at more than 92 percent, according to StarMine, and should earnings surprise, Cree could rebound sharply.

"It looks like one or more investors are speculating on a rally in shares in Cree. Bull call spreads in the June contract comprise nearly all of the options volume generated on Cree in the first hour of the session," said Caitlin Duffy, options analyst at Interactive Brokers Group.

About 5,000 June $45 strike calls were bought at an average premium of $1.80 each, and 5,000 calls were sold at the higher June $50 strike for an average premium of 68 cents each.

Since the net premium paid to initiate the bullish stance amounts to $1.12 per contract, the strategy is betting that Cree shares would surge 12.9 percent over the current prices at $40.85 to exceed the average break-even point on the spread at $46.12 by June expiration, according to Duffy.

Cree shares dropped nearly 14 percent a day after reporting earnings in January and lost 5.5 percent a day after releasing results in October 2010.

(Reporting by Angela Moon, Editing by Andrew Hay)