Micron Technology, Inc. (NASDAQ:MU) reported earnings last night and they over-delivered on expectations and promised even better things to come. Wall Street is rewarding it with a nice pop in the stock price.
When momentum stocks rally this fast, the dilemma to chase them for those who are not already long becomes an issue. Today’s trade is a simple way of going long MU stock, but one that leaves plenty of room for error.
Micron’s future is rosy. Our world is fast becoming completely dependent on technology. MU is one of the few companies that will supply the components to the brains that run this new world. This is to say that there is plenty of room for MU and its competitors to prosper, so the sky’s the limit for a decade to come.
Fundamentally, MU stock is not expensive. It has a 16 trailing price-to-earnings which is on the low end of its industry. Its price-to-book is only 2.5 and for a momentum stock, that’s something I can monetize.
MU stock is not for the faint of heart at these levels. It’s up over 100% in 12 months. Compare that to Intel Corporation (NASDAQ:INTC) which is only up less than one percent. Yet, both stocks are roughly in line from a P/E perspective. So from that sense, Micron is the better value, and value is what I need to profit.
Naturally, I like the price action in MU better. Technically, it has maintained a steady rising channel. Since last November, all dips along the way were long entry opportunities inside that channel.
There is the worry that it has come too far too fast, but that’s why I use options. I don’t buy Micron stock then hope for a rally. If I do that, I fear that I could be late to the party. My conviction would be weak, and at the first sign of trouble I’d hit my stop loss and the trade would be a bust. Instead, I find proven support and sell downside risk against it to create income out of thin air.
Click to Enlarge There is the concern that near $36 per share, MU stock could put in a long-term double top. The correction from those can be devastating to longs. That’s more reason why I can only use options today to participate in the momentum.
So why bother chasing MU stock on this rally in the face of a potential double top? On the monthly chart (pictured above) you can clearly see the upside potential. If MU stock sets a new 52-week high and moves above $36 per share, it could trigger a technical buy signal that could target $50 or higher.
I am not alone in seeing the potential. The average price target from the Micron experts is $45 per share. Current price is also below the lowest of Wall Street price target.
MU Stock Trade Idea
The Trade: Sell MU Jan 2018 $27 put for 65 cents or better, where I have an 85% theoretical chance of success. But if price falls below my strike then I must own the shares and I would accrue losses below $26.35.
Selling naked puts is not suitable for all traders. For those who want to mitigate the risk they can sell spreads instead.
The Alternate Trade: Sell MU $27/$25 where the risk is smaller but I can still yield 15% on risk.
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 as @racernic on twitter and stocktwits.
