Confirmation off and on the Micron Technology, Inc. (NASDAQ:MU) chart puts shares in position for higher prices. But in lieu of getting naked long MU stock, a limited-risk, bull call spread offers investors a stronger-looking alternative to ride this tiger smartly. Let me explain.
A couple months back CNBC’s James Cramer called MU stock “a tiger that needs to be ridden.” The Mad Money host and former fund manager proffered Micron as being in the sweet spot with its solid mix of DRAM, NAND, flash memory and a market just entering a new cyclical bull market.
At the time, a late-December earnings beat produced a year-over-year 33% jump in MU stock’s bottom-line, Micron’s first profit in four quarters and 19% sales growth after shrinking for six straight quarters. The combination of factors were key takeaways suggesting the boom period for Micron had just begun.
Fast (or maybe more aptly, flash) forward and Micron’s more recent earnings report from March 23 went a long ways towards reinforcing and confirming continued upside for MU stock.
For starters the company delivered a second-straight profit for its second quarter as earnings jumped sequentially by 175% and topped Street views on 77 cents a share. What’s more and looking forward, Micron announced a Q3 profit and sales forecast well-above analyst estimates.
The apparent bull market underway in Micron is being helped along by “rocketing demand” for chips, substantial and growing margins and continued weakness in NAND and DRAM supply entering the market.
Net, net it’s great news for MU stock and investors reacted accordingly. In the immediate aftermath shares jumped higher by 7.5%, but did give up intraday gains of nearly 13%. The even better news is the Micron chart now looks to be in better position to continue its bull market.
Micron Stock Daily Chart
Look at the daily chart of MU stock chart and it’s hard not to appreciate a classic uptrend that has emerged over the 11 months. What’s also apparent, above and beyond MU’s series of higher highs and higher lows, is the very similar and constructive post-earnings consolidation work now developing.
Much like in December when Micron beat the Street and investors rushed enthusiastically into MU stock, shares have been digesting overbought gains marked initially by extreme price action outside the upper Bollinger Band and an extended stochastics condition.
Currently and after a couple weeks of working off those technical excesses, MU’s mostly lateral consolidation has established a smallish, high-level, double-bottom pattern. The second pivot low in the formation was confirmed Friday as shares traded through the highs of Thursday’s candlestick.
Stochastics hasn’t altogether confirmed the low, but the slightest turn higher would act as a nice layer of secondary support for MU stock to reassert its bullish uptrend.
What’s also very attractive from a larger chart perspective is that MU stock managed to blast through the 62% retracement level from Micron’s 2014–2015 bearish market cycle. As a general rule, technicians expect a full return move in a stock following a failure of resistance at this key Fibonacci level. And for MU stock, that would result in an eventual challenge of $36.59 from December 2014.
MU Stock Bull Call Spread
If the described high-level double-bottom is to confirm MU stock’s uptrend, a new higher high above $29.87 will be required. From there, a rally to the former high of $36.59 would leave more than 20% of upside for a Micron stock trader.
Bearing in mind the technical landscape and after reviewing MU stock’s options, the July $31/$34 bull call spread is attractive. With shares of Micron trading at $28.52, the vertical is priced for 75 cents and offers a return of 300%, or $2.25, if MU can rally by 19% and above $34 at expiration.
By using the July contract, the trader is allowing for sufficient time for a larger move like this to play out. There’s also another earnings catalyst inside the July cycle, which optimistically we’d like to see MU stock investors react bullishly too for a third straight time.
Bottom line though, tigers like MU do have claws. And defensively, by cutting down decay and implied volatility risks, as well as containing risk to a known amount, this vertical is a smarter alternative to riding shares of MU stock naked long.
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.
