Micron Technology: Thank Intel and Buy MU Stock On The Cheap

Advertisement

Unlike the broader market, Micron Technology (MU) has pared back its unusually strong October gains. But don’t think something spooky is on the horizon technically; the pullback actually has the makings of a bullish treat — and one made more agreeable with a MU stock vertical spread.

Micron Technology mu stock

October had been going smashingly well for MU stock shareholders. After topping both top and bottom-line estimates to kick off the perennially bearish calendar month, Micron ramped up nearly 30% in one trading week.

Then along came Intel (INTC) to whack Micron stock back down a notch or two. On Oct. 20, the world’s largest semiconductor outfit announced, to the surprise of investors, that it was mulling an investment of up to $5.5 billion in a flash memory chip plant based in Dalian, China.

Investors and analysts took saw the report as devastating to Micron’s profits, and as a result, bad news for MU stock, which finished down roughly 11%.

A week removed from those headline and MU stock hysterics, it should be noted that Micron and Intel actually have a strong and mutually beneficial working relationship.

In fact, the factory in Dalian could actually strengthen their business alliance.

Besides, the Dalian endgame is still at least a couple years away. But the immediate result for bulls is a potential treat as MU stock puts together a well-constructed pullback on the weekly price chart.

Micron Stock Weekly Chart

mu-weekly-chart
Source: Charts by TradingView

The weekly chart of MU stock is a reminder that there’s always a bear market somewhere. At the same time, shares of Micron are setting up to prove all trends do eventually end.

Over the past couple months Micron has stopped moving lower. The price action takes on the basic characteristics of a bullish inverse head-and-shoulders pattern, which I’ve labeled on the price chart of MU stock.

Development of the formation has centered on the 62% Fibonacci retracement level from a prior bullish cycle low in October 2012, and has acted as support for the potential pattern low.

An eerily similar, perhaps even spookily deep correction of 63% also suggests MU stock is deep in value territory. Lastly, the low of the right shoulder is finding support from the 50-day simple moving average, which acts to confirm that a bullish trend change is underway in Micron.

Micron Stock Bullish Option Strategy

mu-volatility
Source: Charts by TradingView

Option premiums are currently at a discount to underlying volatility for MU stock. At the same time, prices are relatively steep compared to where premiums have been over the past couple years. The solution to this dilemma is the vertical spread.

A vertical spread is a great way to trade directionally while reducing ambiguity like the pricing found in the options in MU stock right now.

Checking the MU stock options board, the January $17/$20 bull call spread for $1.00 or cheaper is attractive. This gives the trader staying power of 80 days with an absolute predefined amount of risk of $1.00.

If traders respect the discussed MU stock chart formation for money management, a much smaller loss should be possible without fear of being whipsawed out of a position that’s working.

Using the right shoulder low in MU stock as a guide, a money stop $1.00 below current levels initially works to limit risk on the vertical position to 25-30 cents.

On the upside, if MU stock were above $20 at expiration, a profit of $2 (or 200%) is possible as the spread will expand to $3 above the higher strike price. By subtracting the $1 cost to enter the vertical, we are left with the max profit.

As with managing losses, if MU stock fails to cooperate technically, taking a portion of the position off on a test of recent highs just above $19 should generate profits of about 60 to 70 cents and in our estimation, is something worth considering.

Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT

More From InvestorPlace

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2015/10/micron-technology-thank-intel-buy-mu-stock-cheap/.

©2024 InvestorPlace Media, LLC