Cadence Design Systems, Inc (CDNS) designs electronic design software and hardware. The company’s stock is currently trading around $12.75 in a 52 week range of $12.15-$15.96. The stock has been underperforming the broader market this year with share prices falling over 5% year to date. Despite the stocks weak performance this year a trader has stepped in and gotten long CDNS through May of next year. Earlier in today’s trading session a trader sold 9,800 CDNS May 12 puts for $0.65. This is an extremely bullish trade that also represents volume 13.2 times the average daily option volume in CDNS. The large amount of risk attached to this trade also suggests that this trader has very high conviction. This trader is making a large bet that the stock will close above $12.00 on May expiration, we want to express the same view on CDNS using a covered call.
Trade: Buying 100 shares of CDNS at $12.75 for every May 12 Call sold for $1.50
Reward: $75 per 1 lot
Breakeven: $11.25
Should shares of CDNS close above $12.00 on May expiration this trade will achieve its maximum potential profit of $75 per 1 lot. This trade is also profitable anywhere above $11.25. If shares of CDNS close above $12.00 on expiration this trade will net an annualized return of 13.7%.
