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Trade of the Day: Micron Technology (MU)

I'm expecting a repeat win in this name


The last time I recommended Micron Technology (MU) for a covered call strategy, traders who listened would have made an easy 8.4% in a little over a month when their shares were called away. Now it’s time to return to the well.

Let’s get back into the chip maker on this minor pullback so that we can pick up shares at a discount, as the stock continues to  pay covered call traders good option premiums. The company reports earnings on April 3, and estimates have been steadily revised up in recent weeks. MU also has a history of positive earnings beats that could send the stock soaring in the near term.

In fact, MU is a mutual fund and hedge fund favorite with several analysts targeting the stock to hit $30 before this run is over. The shares are due for an upside breakout; if earnings don’t give MU a boost, then we should see them start to sizzle when the tech sector comes back to life, and it will.

My covered call recommendation is: For every 100 shares of MU stock you own or purchase at market, place a limit order to “sell to open” 1 MU Apr. $25 call at $0.80 or more per contract, good till canceled.

Note that there are several MU expirations at the $25 strike; make sure you are selling to open the regular monthly option that expires on Apr. 19.

Assuming you can buy to open MU stock around its Monday close of $23.66 and sell to open the MU call options for $0.80 or more, if MU is trading above the $25 strike price at April options expiration as I expect it will, the shares will be called away from us for better than a 9% return in just a few weeks’ time.

Here’s how you calculate your return for a covered call that’s “called away”:

If MU shares are above that $25 strike on options expiration April 18, then on Monday, April 21, the person who bought our call contract will “call away” our shares at the agreed-upon sale price (the strike price) of $25 per share. But remember that we collected $0.80 in option premium at the start of our trade, so our exit price is effectively $25.80 (the $25 strike plus $0.80).

If our entry was $23.66, and our exit was $25.80, our net return on this three-week trade is better than 9%.

While I remain bullish on the market, a healthy dose of caution is always appropriate, which is why I continue to recommend short-term covered calls with mix of long-term dividend names. A lot is riding on the jobs numbers that are due to be released at the end of this week, and the fact that investors can buy the S&P 500 for essentially where it was trading three months ago should be perceived as a good deal if the economy can add upwards of 200,000 jobs.

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