Micron Technology Inc. (MU) is slated to step into the earnings confessional after the close on March 30. While I typically don’t look at earnings-related trades this far in advance, there are some compelling reasons to consider getting in on MU stock now.
Before we get to those reasons, let’s dive into earnings expectations. Currently, Wall Street is expecting Micron to post a second-quarter loss of eight cents per share, down from the 81 cents per share it earned in the same quarter last year. Furthermore, revenue is seen dropping nearly 27% to $3.05 billion on the quarter.
Click to Enlarge Technically, these poor year-over-year comparisons are already priced into MU stock. The shares have fallen more than 31% since December, guided lower by their 50- and 20-day moving averages. The shares halted that decline in late January, and have spent the intervening weeks bouncing between support at $10 and resistance at $12.
However, MU stock appears poised for a breakout. The shares tested resistance at $12 last week, and are holding firm just below $11 so far this week. A solid close north of its 50-day moving average could bring more bulls to the table for MU stock, leaving only the $12 mark as a short-term technical hurdle.
On the sentiment front, the analyst community remains quite bullish on Micron’s prospects. According to data from Thomson/First Call, 22 of the 34 analysts following MU stock rate the shares a buy or better. Additionally, the 12-month consensus price target for MU stock rests at $15.90 — a 47% premium to Wednesday’s close.
Optimism is also creeping into Micron’s options backdrop. Currently, the April put/call open interest ratio rests at 0.44, with calls more than doubling puts puts among options for the series. While this ratio comes in higher at 0.76 for the weekly April 1 series, a bit of caution is to be expected given MU stock’s technical performance over the past several months.
Overall, weekly April 1 series implieds are pricing in a potential post-earnings move of about 10% for MU stock. This places the upper bound at $12, and the lower bound at $10 — right in line with recent technical support/resistance levels. A breakout to either side could mean that MU stock is finally ready to move out of its weeks-long consolidation period.
With Micron poised for a breakout, there are clearly two ways to play the stock ahead of earnings …
2 Trades for MU Stock
Call Spread: While the stock’s direction will ultimately be decided by Micron’s guidance, I believe that the worst has already been priced into the shares. Barring any hidden turmoil, MU stock appears poised to run higher on any hint of positive nor not-as-bad-as-expected news. As such, I’m leaning toward a bull call spread ahead of Micron’s earnings report.
Along those lines, the April $12/$13 bull call spread has plenty of potential. At last check, this spread was offered at 23 cents, or $23 per pair of contracts. Breakeven lies at $12.23, while a maximum profit of 77 cents, or $77 per pair of contracts, is possible if MU stock closes at or above $13 when April options expire.
Put Spread: Clearly, there is the potential for the situation to get worse for Micron, and if flash pricing and demand guidance remains abysmal, MU stock could be headed for single digits rather quickly. As such, traders siding with the bears might want to consider an April $9/$10 bear put spread.
At last check, this spread was offered at 28 cents, or $28 per pair of contracts. Breakeven lies at $9.72, while a maximum profit of 72 cents, or $72 per pair of contracts, is possible if MU stock closes at or below $9 when April options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
