Micron Technology, Inc. (NASDAQ:MU) stock enjoyed a 150% rally in the past 12 months. But that’s only about halfway back from the 2014 all time highs. Nevertheless, MU stock still has room to go from a technical perspective.
Micron fundamentals are in good shape as we are now more dependent on technology than ever. The trend suggests that the ramp will get even steeper so we are not slowing down. Micron will benefit from the digitization of the globe.
Technically speaking, MU stock is at a long-term pivot level where resistance can build. So jumping all in at this point without a safety net can be risky, especially when equity markets are at all-time highs.
More often than not, it’s difficult to find great entry points in stocks that are on fire. Today, though, we’re getting a dip, which helps. Plus, using MU options gives us a lot more flexibility. There, we can find value areas that I believe are safe, and we can sell risk against them.
Furthermore, the current open interest suggests potential downside pressure.
How to Trade MU Stock Here
The trade: Sell the MU Oct $18 put naked and collect 80 cents per contract. By doing this, we are committing to owning Micron stock at $18 per share if the price falls below it. Our breakeven price in this case would be $17.20. Since we are using longer-dated contracts, I am confident that we can manage risk around the short-term price gyrations. I don’t want to hedge my bet.
That said, selling naked risk isn’t for everyone, so to moderate the trade, we can turn it into a credit put spread instead.
The milder alternate: Sell the MU Oct $19/$17 credit put spread. This is still a bullish trade which will potentially yield 20% on risk.
Both trades have a roughly 85% theoretical chance of success. The spread advantage is that it carries finite risk, but at the cost of lower absolute reward.
So instead of chasing price targets in MU stock, either of these setups will yield profits as long as MU stock stays above the risk. From current prices, we’re leaving more than 25% room for error.
Even though we’re committing to longer-dated contracts, we can close our options trades at any time for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
