In a market overdue for a rest, but one made up of stocks, Micron Technology, Inc. (NASDAQ:MU) looks compelling both off and on the MU chart. And for investors a limited risk, bull call spread looks like a “great deal, a really great deal.”
Let me explain.
When it comes to the stock market, there’s always a bull market somewhere as individual sectors and stocks rotate out and back into favor. That appears to be the situation in MU stock as a Trump-inspired rally shows signs of fatigue in the broader market.
On the business side, Micron is what CNBC’s James Cramer recently called a tiger that needs to be rode. The bullish enthusiasm is tied to the company being in a technology sweet spot with its mix of DRAM, NAND and flash memory, and having current pricing power on a cyclical upswing.
An earnings beat in late December (a 33% year-over-year jump in Micron’s bottom line) provided the company with its first profitable report in a nearly a year. Further, 19% sales growth after six quarters of contracting are recent key takeaways suggesting the latest boom period for Micron has just begun.
MU Stock Weekly Chart
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Monday’s market bucking gain of 0.88% pushed Micron shares to a marginal new year-and-a-half high. The price action is still only a few percent removed from a five-week flat base breakout, which successfully broke above the 50% retracement level of Micron’s 2014 to 2015 bust cycle.
The price action has been strong and there’s little technical evidence MU stock’s bullish cycle can’t continue from here. That said, there is an important area of potential resistance on our chart at the 62% retracement level.
The Fibonacci level lines up with the price area where MU’s bust cycle really kicked in back in mid-2015 and is worth watching. The good news is that’s still a full 8% above the current share price in Micron.
MU Stock Bull Call Spread
Reviewing MU stock’s options and shares trading at $24.18, the March $25/$26 bull call spread is attractive. Priced for even 33 cents, the out-of-the-money vertical has the potential to return about 200%, or 67 cents, if Micron stock rallies above $26 into expiration.
By using the March contract the trader is allowing for sufficient time for last week’s breakout to reaffirm Micron’s fairly staunch, bullish trend without overstaying the course with a longer maturity should conditions go awry.
On the downside, if MU’s uptrend begins to falter, the trader’s risk is ultimately contained to the debit paid. That’s less than 1.4% of the total risk associated with the purchase of 100 shares.
If Micron stock does continue to rally, which given the evidence seems reasonable, the sold $26 call is positioned near the aforementioned area of potential price resistance.
Truthfully, we’re not comfortable calling a top in MU stock. However, given the premium taken in and location of the call on the MU stock chart–that trumps holding long stock and in our opinion makes for stronger overall positioning.
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.
