Shares of Micron Technology, Inc. (NASDAQ:MU) have certainly been on a major bull run this month. After bottoming out at the $45 area to begin the month of May, MU stock has risen an astounding 37% to close at $62.57 yesterday. While Micron stock had undoubtedly gotten extremely oversold earlier, shares are now fast approaching similarly overbought levels. I expect MU to pull back and consolidate over the coming weeks — a move it started big-time so far today.
Click to Enlarge MU stock is getting overbought from a technical perspective. Its 14-day RSI is back above the traditionally overbought 70 level, which has been a reliable indicator of a short term top in past.
More importantly, MU stock failed to hold on to the early gains yesterday after breaking out past $63.50 to fresh new intraday highs. This type of reversal pattern is many times emblematic of a top in the stock, especially after such a strong rally. The buyers finally look to be exhausted in Micron, a look that continues today.
Micron is also getting extended on a comparative basis. MU has the third-largest weighting in the Market Vectors Semiconductor ETF (NYSEARCA:SMH) and is normally highly correlated to the semiconductor ETF. That correlation has broken down over the past month with MU stock being a major out performer.
I look for this divergence to revert to the mean and for Micron to be a relative underperformer over the next month.
Click to Enlarge In my previous article on Micron stock from May 16, I had a decidedly bullish viewpoint and recommended selling bull put spreads to be a buyer on weakness. Now that MU stock has rallied sharply, my bullish viewpoint has tempered-because price does matter.
The rally in MU has also caused implied volatility (IV) to drop in Micron options. IV now stands at just the 23rd percentile, meaning option prices are comparatively cheap. This favors option buying and long volatility strategies when constructing trades. So to position for a pullback in MU stock, a put diagonal spread makes probabilistic sense.
MU Stock Trade Idea
Buy the MU July $60 puts and sell the MU June $57.50 puts for a $1.20 net debit.
Maximum risk on the trade is $120 per spread. Ideally MU stock closes near $57.50 at June expiration to achieve the maximum gain. The spread is 23 deltas net short at inception which is equivalent to being short 23 shares of MU stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
