Technology has been on an epic rally of late. Stocks like Micron Technology, Inc. (NASDAQ:MU) and Advanced Micro Devices, Inc. (NASDAQ:AMD) are up 140% or more in the past year. So needless to say, the long trade has been easy.
Or has it?
When momentum stocks are rallying this fast, they tend to appear perpetually ready for a dip. This keeps a lot of investors out waiting for that dip that rarely comes. To avoid this dilemma, I use options instead of buying the equity.
With options, I have hundreds of ways I can bend time to build fairly healthy buffer zones in front of my risk. This usually gives me more conviction in my trades. This is especially important for Micron stock trades, since it’s not cheap at an over 50 price-to-earnings ratio. Compare this to the P/E of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) at 33 or Apple Inc. (NASDAQ:AAPL) at 17. So I will need help with conviction on any long trade at these altitudes.
Click to Enlarge I know that I don’t want to be out and miss out on MU’s upside potential. This is a digital future that we are heading into and this stock will be an important piece of the puzzle. I don’t see it as a race between leaders of the sector. I rather believe that there is enough room for most of them to prosper.
Using options virtually eliminates the need for me to be perfect with my timing. So even though Micron stock is near highs, I can still commit long today with relative confidence.
The thesis is that as long as the equity markets are holding strong, the stock will not have a major correction this year. Even still, I will not chase price targets. I will generate income out of thin air betting against extreme negative scenarios.
Technically speaking, I have reason to believe that MU stock has opportunities ahead. The stock is currently filling a breakout potential in progress. But it has even bigger opportunities a bit higher still. So if momentum continues to drift higher, there could me more spikes to come.
MU Stock Trade Idea
The Bet: Sell the MU Aug $27 put and collect 50 cents per contract to open. I have an 80% theoretical chance of success. However if the price falls below my strike, I will own the shares and could suffer losses below $26.50. I am committing to owning the shares about the same level from which the stock sprang on the last earnings report. It’s not likely that the story will disappear on this coming report.
I could use credit spreads to lessen the risk that comes with selling naked options. This would better suit smaller accounts and traders who are a bit more risk-averse.
The Milder Version of the Bet: Sell MU Aug $27/$26 credit put spread for 15 cents, where I have the same chance of success but with limited risk. Yet if successful, the spread would still yield 15%. Compare this with risking entry near the recent highs and then hope that we Micron stock rallies another 15% just to match the performance of the spread.
Selling options is risky, so I make sure to never risk more than I am willing to lose.
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.
