Semiconductor stocks are on fire right now. With Advanced Micro Devices, Inc. (NASDAQ:AMD) surging 16% yesterday and Nvidia Corporation (NASDAQ:NVDA) set to take the earnings stage next week, there is more than enough buzz to lift the sector as a whole. Amid this storm of quarterly reports, Micron Technology, Inc. (NASDAQ:MU) quietly broke out to a new 52-week high yesterday, and is primed for a pair of trading ideas.
MU stock is currently less volatile than either AMD or NVDA, and the shares have legs to run even higher, making it an excellent target for options traders.
Before we dive into the sentiment backdrop for Micron stock, there was a significant development on MU’s technical charts yesterday that’s more than worth mentioning. Specifically, the shares are on the breakout leg of a short-term cup-and-handle formation.
Click to Enlarge The “cup” of the formation resolved throughout most of January, with the “handle” occurring as MU stock battled resistance at $24 during the past week.
Yesterday marked the upside breakout for Micron, and once today’s marked headwinds subside, Micron should be in rally mode once again.
And there is plenty of potential sideline fuel for that rally.
Micron Sentiment, Options and Short Selling
For one, while most analysts hold a bullish outlook for MU stock — Thomson/First Call reports that all but five of the 28 analysts following the shares rate them a “buy” or better — the 12-month price-target has plenty of room for revision. The consensus target of $26.94 represents a premium of only about 8.8% to yesterday’s close.
Elsewhere, short sellers have yet to capitulate to Micron’s uptrend. As of the most recent reporting period, some 59.5 million shares of MU stock were sold short, representing more than 6% of the stock’s total float. With yesterday’s breakout promising more upside, a round of covering could be in the mix during the next week.
And if MU’s options activity is any indication, these shorts are sweating. Currently, the February put/call open interest ratio rests at 0.53, and is falling steadily as calls are being added at a much faster pace than puts among short-term options.
In other words, Micron options traders are betting on a rally, and short sellers may be hedging against a continued run.
Overall, February implieds are pricing in a potential move of about 5.7% for MU stock heading into expiration on the 17th. The resulting upper bound lies at $26.16, while the lower bound rests at $23.24, in the area of MU’s 10-day moving average.
2 Trades for MU Stock
Call Spread: Strong price action, a cup-and-handle breakout and rising bullish sentiment in the semiconductor sector all point toward higher prices for Micron stock over the short-term. MU already received a sympathy boost from AMD’s quarterly report, and Nvidia’s report next week could offer up a similar lift. Traders looking to bet on an extension of yesterday’s breakout might consider a Feb $25/$26 bull call spread.
At last check, this spread was offered at 33 cents, or $33 per pair of contracts. Breakeven lies at $25.33, while a maximum profit of 67 cents, or $67 per pair of contracts, is possible if MU stock closes at or above $26 when February options expire.
Put Sell: The wild card here is geopolitical concerns surrounding the Trump administration. These concerns have yet to impact Micron directly, but broader market concerns could impact MU stock’s move higher. Traders looking for a more neutral strategy to take advantage of technical support might consider a Feb $23 put sell.
At last check, this put was bid at 25 cents, or $25 per contract. In this trade, you keep the premium as long as Micron stock closes above $23 when February options expire. On the downside, if MU trades below $23 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $23 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.