Don’t let the skeptics fool you. Off and on the price chart, Micron (NASDAQ:MU) is one to believe in. But this strategist will concede, buying the unique growth and value proposition MU stock is offering investors is made a good deal stronger with a modified bullish butterfly. Let me explain.
Once again Micron proved the doubters wrong. Last night the memory chip specialist cruised past Street estimates and issued above-views guidance. But for those still anxious about the prospects of a cyclical downturn in a business historically prone to volatile ups and downs — it’s time to relax.
Investing, of course, is inherently risky with no guarantees. And Micron isn’t immune. Currently, hoarding and China-related concerns top the list of worries for many investors. But the message from Micron’s CEO continues to jibe with an emerging trend of much lower cyclicality in Micron’s key DRAM and NAND markets and increasingly, a more stable environment due to the ever-growing need for memory chips.
The upbeat but matter of fact statement from Micron’s top brass is a reflection of secular growth in markets and various storage intensive applications such as the cloud, data center, mobility, artificial intelligence, and augmented reality. Bearing that in mind, this strategist sees the latest round of post-earnings skepticism as confirmation the trend in MU stock is still a friendly, albeit sometimes volatile one for bullish investors.
MU Stock Daily Chart
To be sure, it would have been nice in the short-term if MU stock held onto its early gains instead of closing near Thursday’s low and up just 0.7%. But, while Micron’s business is becoming less prone to cyclical volatility, MU stock and its doubters have kept loose price swings in the shares a fixture.
The good news for Micron bulls is that a supportive corrective base formed over the last few months is now developing a tighter, high handle pattern after setting intermediate highs. The combination suggests a breakout and new highs for MU stock are on the horizon.
Bears, on the other hand, likely see things a bit differently for Micron. For instance, there are a couple lower highs built within the same month-long handle formation discussed immediately above. But don’t let them fool you — unless you like fighting a losing battle with new worries to support the cause, but no real ammo to think this time is really different.
MU Stock Bullish Modified Butterfly Strategy
Given the obviously bullish view above, one spread on the radar which packs value and can enjoy terrific profit growth is a bullishly modified Aug $62.50/$67.50/$70 call combination. With MU stock at $59.44 the spread is conservatively priced for $1.
What’s the price of admission afford Micron bulls? For starters, risk in a still volatile MU stock is contained to the debit or roughly 1.70% of the exposure tied with owning shares outright. I like that in the event MU fails to cooperate technically as it puts traders in a stronger position, financially and mentally, to re-enter when opportunity knocks again.
This modified spread can also generate a maximum profit of $4 or return of 400% in two months if Micron shares finish at $67.50 on expiration. That’s unlikely, but never say never. Realistically, I’d be more concerned with MU overshooting a purchased and above-market butterfly meant to capture profits on a rally and instead wind up with a loss.
And with this variation, that has been accomplished. Due to the wider embedded bull call spread relative to the bear vertical, a $1.50 profit above $70 is guaranteed. And while that’s a compromise for some bulls, given the cost of the spread, that’s still a nice value proposition for generating solid profit growth in one’s portfolio.
Investment accounts under Christopher Tyler’s management currently own positions in Micron (MU) and its derivatives. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
