Micron (NYSE:MU) has rebounded smartly from both a disappointing earnings report and veiled threats out of China on DRAM price fixing. MU stock has risen nearly 10% over the past eight trading days since making a low of $51.48 on July 3, but it is now running into some serious resistance.
Micron stock certainly sits at an important inflection point and seems poised for a major move. I look for the stock to break out of the recent consolidation in a convincing manner over the coming weeks.
In my previous analysis on MU stock from May 31, I laid out a bearish thesis. This proved to be the top on Micron with the stock subsequently falling sharply. Now that shares have recovered somewhat, my bearish tone has tempered because its price matters.
From a technical perspective, Micron stock is at a critical juncture. It filled in the post earnings gap at the $57.10 level yesterday before reversing course. Shares also closed just below the important 50-day-moving-average at $56.24.
MU stock has had a series of both higher lows and lower highs, meaning it is coiling ever tighter and it is likely poised for a dramatic breakout.
Implied volatility (IV) in Micron options is now at the lowest levels since late November, right before Micron stock had a big drop.
IV is at the 21st percentile, while historic volatility (HV), which measures how volatile MU stock has actually been, is much higher at the 68th percentile. This means option prices are very cheap in comparison to how much Micron shares have been moving.
So to position for either a pop or drop in MU stock, a comparatively cheap option strangle trade makes probabilistic sense.
A strangle trade involves simultaneously buying an out-of-the-money call and out-of-the-money put, which benefits from a larger move in the underlying stock than the options market has priced.
MU Stock Trade Idea
Buy the MU Aug $57.50 calls and buy the MU Aug $55 puts for a $4.25 net debit.
Maximum risk on the trade is $425-per-strangle. Ideally, Micron stock moves dramatically up or down from current levels to realize maximum potential profits. More risk adverse traders can elect to sell shorter-term calls and puts against position to lower the overall risk.
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.
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