Micron Technology, Inc. (NASDAQ:MU) has been more bust than boom in recent weeks. But if you trust a bullish and still developing big picture off and on the MU stock price chart, Micron’s options market can help traders weather notorious volatility with less risk and outsized return potential. Let me explain.
MU stock is a tiger demanding to be rode, as supported by a multiyear boom cycle in the DRAM and flash markets. And that’s according to The Street and CNBC color analyst James Cramer, who has pulled in his bullish tail on MU stock.
On Tuesday, the former hedge fund manager backtracked on his prior long-term bullishness. Cramer questions if DRAM prices have climbed too high and whether a supply glut is building quietly in the background as competition tries to capture some of the action while the getting is still favorable.
Cramer went on to don his technical trading cap and warned MU stock needed to get above $31 a share. He didn’t elaborate on the significance of the price level in MU, but it does line up with last week’s price gap in Seagate Technology PLC (NASDAQ:STX) and Micron’s 50-day simple moving average.
If $31 in MU stock isn’t cleared, Cramer warned investors would see a disequilibrium between the memory business and what’s happening on the price chart — which could result in shares of Micron falling quickly to $20.
Elsewhere though, off and on the chart it’s far from a one-way Street on MU stock’s prospects. DRAM manufacturer SK Hynix’s bullish report this past week is certainly a feather in the cap of bulls still anticipating better days ahead for Micron.
Secondly, the absence of other defecting analysts from a very bullish group, is seen, in this instance, as a positive. In fact, Citigroup reiterated its $45 price target and recommending buying MU stock on weakness.
Lastly and not to be forgotten, MU’s big technical picture is still suggesting a much larger bullish cycle is in the works. Not only is the view supportive of Citigroup’s note to buy on weakness, but it even makes the call appear much less threatening.
MU Stock Weekly Chart
Click to Enlarge
As this relates to MU stock, we find a potentially ominous-looking downtrend over the past several weeks is more reasonably approached as a constructive counter-trend consolidation within a 15-month uptrend.
There’s no guarantees the more volatile noise and nauseating zigs and zags on the lesser daily time frame can’t turn into something more menacing.
For now though, with stochastics flirting with an oversold condition and MU stock maintaining its composure above a couple key Fibonacci levels — buying on weakness looks a good deal less hazardous for trend followers.
MU Stock Bullish Combo
Click to Enlarge
Let’s face it, hazards exist on even those charts we believe most strongly in. MU stock is no exception. As much, to keep potential losses under complete control and reduce risk at the same time I like the idea of buying today on Citigroup’s “weakness” and incorporating Cramer’s $31 make-or-break level using a long bull call spread strategy.
Reviewing Micron’s options and shares at $28.34, the Oct $31/$35 call vertical is priced for 65 cents and viewed favorably. For the equivalent of 2.3% MU stock risk this trader can potentially earn $3.35, or a return of 515% if shares are above $35 at expiration.
Personally, while risk in this MU position is fully contained and Greek risks greatly reduced due to the countering call contracts embedded in the vertical, I’d also consider using a 50% money stop loss if the situation arises.
Likewise, booking partial profits or reducing risk further with other spread adjustments such as a bullish butterfly is also and always a good policy.
Investment accounts under Christopher Tyler’s management currently own positions in MU stock and its derivatives. 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 and StockTwits.
