Micron Technology, Inc. (NASDAQ:MU) reported earnings last night and they delivered a gem. The stock spiked in a knee-jerk reaction and it was deserved. They beat on both the top and bottom lines — and perhaps more importantly they guided higher into the next quarter. But it hadn’t been all roses for MU stock.
In December, MU stock fell almost 20% as investors worried about pricing pressures. Last night, Micron management told an opposite story of margin expansion and favorable product mix. These are not symptoms of pricing models. There is no hair on the report for the quarter past, and there are no new worries into the next. And therein lies my opportunity.
I want to set a bullish trade into 2018, but I’d like to leave some room for error. After all, stocks are at all-time highs and investors are nervous. So although I am confident that MU fundamentals are worthy of my risk, I am less confident that Wall Street won’t have a tizzy in the next few months, especially since politicians are in control of the headlines.
I don’t like to chase prices higher. Instead, I prefer betting on proven support. That’s why I use options rather than risk $46 to buy the shares with no buffer. Micron is a momentum stock. It runs fast and long. This often makes perfect entry points difficult to find. But by using options, I can bend time to reduce my need to be surgically accurate trading the stock.
In the current macroeconomic thesis, MU stock is cheap with a price-to-earnings ratio of 10. This is a bargain in relative and absolute terms. This makes it 40% cheaper than Intel Corporation (NASDAQ:INTC) and Western Digital Corp(NASDAQ:WDC), and 80% cheaper than Nvidia Corporation (NASDAQ:NVDA).
On its last dip, Micron stock found its footing. Now, with an earnings rally, I can assume that the recent support we’ve seen in December is solid. I will bet on it to generate income into early 2018. It is important to know that if my thesis is wrong, I will need to own the shares at a discount. But even in that scenario I don’t consider it to be a disaster since I believe in the fundamentals.
Click to EnlargeThe options bets coming into last night suggested that investors, including me, were expecting a move higher towards $45 per share. I expect that to continue, or at least stay in lock step with markets in general.
It is also worth noting that the monthly Micron stock chart shows a potential measured move above $58 per share. This is on a breakout from a long-term neckline that triggered just below $40. Such rounding bottoms that take over a decade to happen are usually powerful and can overshoot. Although this would benefit my trade, I do not need it to happen to profit.
MU Stock Trade Idea
The Bet: Sell the MU Feb $41 naked put. This is a bullish trade where I collect $1.10 to open. Here I have a 80% theoretical chance of success. But if the price falls below my strike then I accrue losses below $39.90.
Selling naked puts carries big risk especially for a momentum stock like MU. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the MU Feb $41/$39 credit put spread. The spread has the same odds but would deliver 25% yield on risk. Neither trade require a rally to profit. In fact the stock can fall an additional 11% and I could still retain maximum gains.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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.