Komag and Cree: A Double Option Play

The next time you have a bright idea, instead of a light bulb over your head, you may have to rethink the image and replace it with an LED. Those little red lights on the VCR, alarm clock or coffee maker are light-emitting diodes, commonly known as LEDs, and their future is indeed bright as LED technology, which is looking to be the "go-to" technology as traditional incandescent bulbs begin being phased out of common use over the next five to 10 years.

Cree(CREE Quote) announced Wednesday that it had just reached a development milestone by creating a defect-free silicon carbide 100-mm wafer. The company's financials are glowing as well. Cree's 2006 earnings came in at $423 million, zero debt and free cash flow of more than $265 million.

Yesterday I highlighted Color Kinetics(CLRK Quote) as a potential investment opportunity because of its position in the LED market. But Color Kinetics has made a run up recently, so its deep-in-the-money calls come with too high a premium. With Cree, not only do we have the potential to buy an innovator in the field with an impeccable balance sheet, we also have the ability to gain increased leverage using DITM calls.

With the stock trading near the 21-day and 50-day simple moving averages, and overtaking the 200-day simple moving average at yesterday's close of $21.84, this presents a nice time to move into a DITM call. I have placed a limit order to buy 10 contracts of the December $17.50 (CQRLW) calls for $5.40 or better. This allows us to control 1,000 shares of a company on the cutting edge of technology for more than six months.