Yesterday’s sell-fest was just what the doctor ordered for extended stocks. Occasional bouts of profit taking bring overheated stocks back to low risk buy zones. Look no further than Micron Technology, Inc. (NASDAQ:MU) for a prime example. MU stock vaulted into the cheap seats with last month’s pop to $15 leaving little reason to get involved.
Until now, that is.
This week’s retracement has ushered Micron shares right back to potential support. MU’s current perch is interesting for a couple of reasons. So if you’re a believer in its newfound uptrend, now’s as good a time as any to climb aboard!
First, with yesterday’s southward journey, the stock officially filled the gap created by the overnight moonshot July 25. Gaps, once filled, have a tendency of acting as support. Indeed, yesterday’s late-day rebound confirmed buyers were active in this area.
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Second, MU stock is now testing the 20-day moving average which is often a gathering ground for dip buyers. If the 20-day fails, the 50-day moving average is looming closely beneath as a backstop.
The MU Stock Trade
Despite the implied volatility rank descending to the basement in Micron options, naked puts remain interesting here. For starters the cheap price tag of the stock is making the margin requirement for short puts extremely low.
Low margin requirement translates into a high potential return on investment. And notwithstanding the low implied volatility rank, the general volatility of Micron options runs hot because the stock knows how to shake-n-bake.
Currently, we can sell the Sept $12 put for around 30 cents. Remember, when selling puts we’re obligating ourselves to buy 100 shares for each contract sold. So the risk is that MU falls beneath $12 by next month requiring you to snatch up shares at a cost basis of $11.70 ($12 to 30 cents).
If you’re a willing buyer down there, then simply ride to expiration and allow assignment if Micron tumbles. Otherwise the put will expire worthless, allowing you to pocket the 30 cents.
If the 30 cents doesn’t sound like much then you need to reframe your perspective. The margin requirement (read: cost) of the trade should be around $150 which means the return on initial investment is a respectable 20% return. Not too shabby for a high probability play.
At the time of this writing Tyler Craig owned short puts in MU.
