Micron Technology Inc. (MU) stockholders have had it rough this year. MU stock has shed more than 30% since the start of 2015, and the shares still appear to be searching for a bottom.
Unfortunately, the company’s third-quarter earnings report, which is slated to hit the Street after the close tomorrow night, is not expected to offer up much in the way of bullish inspiration.
Digging into the numbers, Micron earnings are expected to plunge 41% year-over-year from 79 cents per share to 56 cents per share. Additionally, revenue is seen slipping 2% to $3.9 billion.
Falling DRAM prices are the main concern for Micron, and while there is little to be done for the third quarter, better-than-expected guidance for the second half of 2015 could still provide hope for MU stockholders.
The brokerage community certainly feels that MU stock is worth holding on to. According to EarningsWhisper.com, some analysts are whispering that Micron could post earnings of as high as 61 cents per share.
In fact, the brokerage community as a whole has doled out 25 “buy” ratings, compared to seven “holds” and two “sell” ratings. Furthermore, the current 12-month consensus price target for MU stock rests at $35 — representing a hefty premium of 46% to Wednesday’s close at $24.06.
Options traders are also betting bullish on MU stock ahead of earnings. Currently, the June/July put/call open interest ratio for MU rests at 0.64, with calls nearly doubling puts among options set to expire within the next month. What’s more, this ratio plunges to a reading of 0.38 (calls nearly tripling puts) when we look just at weekly Jun 26 series options – i.e. options that will be impacted most from Micron’s quarterly report.
Click to Enlarge Overall, weekly Jun 26 series option implieds are pricing in a potential post-earnings move of about 6.3% for MU stock. This places the upper bound at $25.51, and the lower bound at $22.49. Looking back over the past two years, MU has averaged a post earnings move of 5.3%, meaning that MU options are a bit overpriced when compared to historical implieds.
2 Trades for MU Stock
Put Spread: Bullish sentiment of the type currently leveled against MU stock is usually reserved for those stocks in the midst of a strong, longer term rally. Not one that has shed more than 30% of its value in the past several months. Given this poor price action, and the potential for continued weakness in the DRAM market, I’m not convinced that Micron will be able to turn things around for MU stockholders any time soon, let alone with tomorrow’s quarterly report.
As such, I’m leaning toward a bear put spread ahead of the event. Those traders wanting to bet against the bullish grain might want to consider a Jul $22/$24 bear put spread. At last check, this spread was offered at 65 cents, or $65 per pair of contracts. Breakeven lies at $23.35, while a maximum profit of $1.35, or $135 per pair of contracts, is possible if MU closes at or below $22 when July options expire.
Call Sell: If betting directly against MU stock isn’t your style, you might consider entering a weekly Jun 26 series $26.50 strike call sell position. Such a trade is especially useful if you already own MU stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $26.50.
At last check, this option was bid at 13 cents, or $13 per contract. A sold call allows you keep the premium as long as MU stock closes below $26.50 at expiration. On the downside, if MU rallies above $26.50 prior to expiration, you could be forced to provide 100 shares at MU’s current market value for each call sold, which could be quite costly if you do not have enough MU stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
