Micron Technology, Inc. (NASDAQ:MU) stock has not been a popular one of late. Recently the company caught a nasty downgrade that called for a target of $35 per share. At the time the price-earnings ratio was under 8.
This morning, MU stock is rallying as indices are slipping. It appears Micron investors are fickle, which usually is an opportunity for easy trade setups. Today I am not chasing upside hopium in MU stock. Instead, I am betting that the naysayers of this company are wrong with their estimates.
This is a rinse and repeat trade setup, so I come into it with profits in hand. Fundamentally, there is no doubt that this company is cheap from a P/E perspective and based on trailing 12 months results. The bears see major risks for their pricing power so they think that even though it’s cheap, it will get cheaper. I disagree and therein lies my opportunity.
Technically, Micron stock has been tested enough times that we have clear support zones. The five-year range on the stock is massive ranging from $9 in 2016 to $63 in March. Often extremes are wrong on either side. Somewhere in the middle lies the truth.
The latest major pivot point in Micron stock is around $46 per share. This has been a major zone of contention Zone since November of last year. Below it I believe there is support against which I can sell downside risk to create income with no money out-of-pocket.
If I’m wrong and price falls below my levels, then I will own shares of Micron at a deep discount from current prices. In the long-term, I believe I can manage out of those for a profit in a rising economy.
We now live in a technology-based world that is getting even more so at a neck-breaking pace. Most companies that supply components to feed this tech will do well for years to come.
The Trade: Sell MU Oct $41 naked put and collect $1.50 to open. Here I have an 80% theoretical chance that I would retain maximum gains. But if the price of MU stock falls below my strike then I accrue losses below $39.50.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the MU Oct $40/$38 credit put spread where I have the same odds of winning but with much smaller risk. Yet the spread would yield 20% if successful.
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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.
