MU Stock: Trade These Options Before Micron Earnings

by Joseph Hargett | April 1, 2014 1:24 pm

Micron Technology (MU[1]) has been caught up in a whirlwind of NAND and DRAM flash pricing speculation during the past couple of weeks. MU stock was pushed sharply lower last week on concerns of weak flash prices, but some analysts believe that inventory constraints and rising demand will create a floor for these key smartphone components.

Either way, Micron will have a chance to finally clear the air when the company releases its second-quarter earnings report after the close of trading on Thursday, April 4.

And traders might want to consider playing options on MU stock ahead of that report.

Micron Earnings Expectations & Sentiment

The consensus is expecting Micron earnings to surge to 61 cents per share from a loss of 28 cents per share in the same quarter last year. Furthermore, revenue is expected to nearly double from $2.08 billion in the year-ago quarter to $3.98 billion this year. What’s more, most in the analyst community are expecting Micron to lift its 2014 outlook due to rising demand for solid-state hard disk drives, which depend on flash memory.

Sentiment is trending bullish within the brokerage community ahead of Micron’s quarterly report. For instance, the second-quarter whisper number arrives at 79 cents per share — 18 cents higher than the consensus.

There still is room for improvement, however, as analysts have also doled out 18 “buy” ratings, 11 “holds,” and four “sells.” Meanwhile, the 12-month consensus price target rests at $30, representing a modest premium of about 27% to yesterday’s close.

In other words, MU stock could see additional lift in the form of upgrades or price-target increases if Micron hits or exceeds Wall Street’s earnings expectations.

Outside of the brokerage bunch, short sellers have shown some disdain for MU shares. According to data from the most recent reporting period, some 124.7 million Micron shares have been sold short, accounting for 12.6% of the stock’s total float, or shares available for public trading. This wealth of short positions could provide more than enough for a short squeeze situation for MU stock.

Turning to MU options data, short sellers might be a bit worried about the outcome of this week’s quarterly report. Typically, short sellers will buy call options to hedge their positions ahead of an event, such as earnings, to guard against an unexpected rally. With MU sporting an April/May put/call open interest ratio of 0.65, there is evidence of call buying heading into Micron earnings.

Drilling down on MU’s weekly April 5 options activity reveals an even heavier bias toward call options. Specifically, the weekly April 5 put/call open interest ratio comes in at 0.45, with calls more than doubling puts among these soon-to-expire contracts.

Drilling down on this options activity reveals peak MU call open interest at the in-the-money weekly April 22 strike, totaling 34,426 contracts. Other notable strikes include the April 21, 24 and 25 calls, which sport open interest in excess of 21,000 contracts each.

On the put side, the heaviest accumulations arrive at the out-of-the-money weekly April 21 strike, where 15,636 puts reside. Another 11,316 puts are open at the weekly April 23 strike.

Overall, weekly April implieds are pricing in a potential post-earnings move of about 10%. This places the upper bound for a post-earnings move near $26.39, while the lower bound arrives at $21.61.

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Technically speaking, the shares peaked just shy of $26 in mid-February after a long rally that saw the shares rise off their October 2013 lows near 16. Since February, MU stock has been pressured lower over potentially weak flash pricing and slow economic growth. The shares recently bounced off support near $22, driven by positive analyst comments regarding flash demand.

MU stock has since reclaimed support at its 10-day moving average, but is still staring up at its 20- and 50-day trendlines. Breakouts above these longer-term moving averages could bring technical buyers back to the table.

Options Trade on MU Stock

Given MU’s strong long-term price action, the lingering pessimism among short sellers, and the potential for strong guidance, I find it hard to go against the grain when trading Micron stock. As such, traders looking to take advantage of a potential post-earnings rally out of MU stock might want to consider a bull call spread; specifically, the May 23/26 bull call spread.

The May 23/26 bull call spread was recently offered at $1.18, or $118 per pair of contracts. Breakeven lies at $24.18, while a maximum profit of $1.82, or $182 per pair of contracts, is possible if MU closes at or above $26 when April options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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