Even thought I’ve have good results trading Micron Technology, Inc. (NASDAQ:MU) from the short and long sides, my preference is to be bullish equities. So today, my goal is to set another bullish bet on MU stock that’s designed to be boring and profitable.
Boring trades are ones that need little attention. I do extensive homework so I can set the risk at levels that have a high chance of success. But Micron has already rallied by more than 170% in a year, and chasing a stock that has already gone so far, so fast, does not give me a high certainty of success.
This means if we want to play MU stock, we need to do so via the options market.
Now, Micron fans probably won’t like my next few words, but worry not — they are indeed a precursor to a bullish trade.
Fundamentally, I find it misleading that some trading platforms rate Micron stock as cheap compared to the industry average. If I can buy Intel Corporation (NASDAQ:INTC) at a price-to-earnings ratio that’s less by a third, and get a healthy dividend to boot, MU shares are not cheap.
Sure, there are other things to consider than pure financial metrics; all I’m saying is Micron stock, while a buy, isn’t a screaming buy.
Click to Enlarge Technically, Micron recently has printed two attempts at $30, which was a measured move that I had set for shares in late January. So unless the bulls succeed soon, the experts will be talking about double-tops.
Conversely, if the bulls can push through to $30 per share, the momentum could carry MU stock through to a new 15-year high.
So instead of risking $28 per share to buy Micron here and without any room for error, I will sell downside risk in put options below proven support levels and let time do the work.
How to Trade MU Stock
The bet: Collect $1 to sell the Jan 2018 $21 put naked with a 75% certainty of success. The risk? If Micron falls below $20, I will start to accrue losses.
Selling naked options is risky and not suited for all traders. If I am not willing nor able to own MU shares, then I should use credit put spreads instead.
The alternate: Sell the 2018 $21/20 credit put spread, where I have the same odds of winning but which much less risk. The cost for the compromise is reasonable since the spread would still yield 20% on risk.
Compare that with risking $28 with no buffer and needing MU stock to rally 20% to match the performance of the spread. That’s a much better deal in my book.
Learn how to generate income from options here. 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.
