How to Capture Risk-Adjusted Triple-Digit Gains in Micron Stock

MU stock - How to Capture Risk-Adjusted Triple-Digit Gains in Micron Stock

Source: Shutterstock

Investors took a stroll down memory lane Thursday and decided once again that Micron Technology (NASDAQ:MU) was a buy. But if you’re looking to get long an ever-volatile MU stock, using a strategically placed bull call spread is a better way to suit up. Let me explain.

It hasn’t been a very endearing couple months since MU stock reported earnings. Despite crushing views and delivering upside guidance Wall Street opted to sell-the-news and go well-beyond what most would call simple profit-taking. In the process shares of Micron have declined by 11% since the quarterly results—and at their worse tumbled by a volatile 22%!

Behind the drop in Micron shares, investors collectively donned their more cautious eye-wear focused on China trade worries and fears a super cycle for MU stock’s memory chips wouldn’t come to pass, despite a very upbeat message from management to the contrary.

The good news is stock volatility and investor perception are a two-way street, as anyone familiar with Micron can attest too. Moreover, with the less-kind behavior sending MU stock into a double-bottom pattern and Thursday’s bullish about-face by Wall Street on news Micron is boosting its investment in its business by $3 billion over the next ten plus years; it’s time to go long — again!

MU Stock Weekly Chart

MU Stock Weekly Chart
Source: Charts by TradingView

I’ll be the first to admit, I was off the mark in my technical forecast following last quarter’s earnings release and seeing continued upside for MU stock.

Yet, with shares now confirming a high-level double-bottom pattern on the weekly view which found support off the 50% retracement level and a supportive stochastics setup, our other expressed view of taking advantage of opportunistic price volatility is staring Micron bulls in the face.

Micron Stock Intermediate Bull Call Spread      

Despite being 100% wrong on MU’s price action in late June, a proffered modified butterfly spread which risked a scant 1.7% during MU stock’s decline of 22% was a wise choice for positioning. As well and noted at the time, this type of protection could always serve the purpose of helping bullish traders take advantage of any future adverse volatility in Micron.

Reviewing Micron’s options for fresh ways to get long exposure, one favored combination is an out-of-the-money bull call spread. Specifically and with MU stock at $52.76, the Jan 2019 $57.50/$70 call vertical for $2.65 looks like a good spread to help achieve stronger risk-adjusted returns.

For about 5% of the risk associated with buying shares of Micron, this bullish trader not only limits risk in this still very volatile stock, they’re also in position to enjoy solid profits if MU continues to act like it usually does, but with a kinder turn in price volatility.

If MU stock can retest its pattern high near $65 over the next few months, the spread will balloon from its current price to $7.50 at expiration. For this trader that represents a profit of $4.85 or 183%. Further, if a breakout finally occurs, $70 or higher and $9.85 in profit is certainly not out of the question since there are two built-in earnings catalysts during the life of this vertical.

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.

Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC