In the last 30 days, Micron Technology, Inc. (NASDAQ:MU) stock corrected 18% from its November highs. But before you break out the violins, it is still up over 80% year-to-date, so there is potential for further downside. But since the macroeconomic thesis has not changed, I am willing to bet that it will soon find footing.
Fundamentally, MU’s potential should be rosy. Our dependency on technology is increasing exponentially. Micron is one of the few companies who provide the inner-workings of said tech. So there is room for it an all of its competitors to prosper.
Furthermore, MU stock sells with a price-to-earnings ratio under ten. This is cheap in relative and absolute terms. Compare this to Amazon.com, Inc. (NASDAQ:AMZN) which has a price-to-earnings ratio of 290. Even within its own sector, MU is 40% cheaper than Intel Corporation (NASDAQ:INTC) and Western Digital Corp (NASDAQ:WDC), and 80% cheaper than Nvidia Corporation (NASDAQ:NVDA).
Technically, the recent dip in MU stock brought it down to a level that has been already consolidated. Neither bulls nor bears will want to relinquish it without a fight. So this should create a bottleneck and provide support.
Furthermore, when there is a binary catalyst like earnings, I tend to go-with-the-flow.
The current bets that I see in the options market suggest that traders expect a move higher towards $45 per share. But since the Dec. 19 MU earnings event is indeed binary, I will set a bullish bet that doesn’t not need a rally to profit just in case the coin comes out bearish.
I have more faith in the support below than the upside potential. If the rally comes, then my profits would materialize faster. But by selling risk below support, Micron stock can fall another 15% and I can still retain my maximum gains.
Wall Street expectations fall in line with my interpretation of the open interest of options. MU is now trading 20% below the average price target. So clearly, analysts expect higher prices which supports my thesis here. Nevertheless, I will not buy MU shares outright, to then hope for a rally so I can profit.
Click to Enlarge Even more bullish is the fact that the monthly MU chart shows that it just broke through the neckline of a 15-year-old cup and handle pattern. Those are bullish and should target $65 per share in its measured move. Again though, I am not relying on this happening for me to profit.
MU Stock Trade Idea
The Trade: Sell the MU Feb 2018 $35 put and collect $1 per contract to open. Here I have a 90% theoretical chances that price will stay above my level. Else, I will accrue losses below $34.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the MU Feb 2018 $35/$33 bull put spread, where I have the same odds of winning. If so, then the spread would yield 20% on risk.
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.