Investors took another stroll down memory lane this past week and decided once again, Micron Technology (NASDAQ:MU) was a sell. But if you’re a contrarian wanting to buy an ever-volatile MU stock, a strategically placed bull call spread remains a better way to suit up. Let me explain.
An always-lurkingMU stock bear came roaring back this past week with a vengeance. Shares plummeted nearly 15% after a warning Wednesday from semi equipment maker KLA-Tencor (NASDAQ:KLAC), a bearish note on memory chips from Morgan Stanley and immediately followed by Micron’s management spooking investors with a mixed update Thursday taken to a cautious extreme.
Speaking at a Citi conference Micron’s CFO noted weaker NAND prices in the third quarter. The news helped send MU stock down nearly 10% on the session, despite positive items such as average selling price increases in the company’s multi-chip products and expectations the NAND market will grow at about 40%.
While investors were quite decisive in selling shares Wednesday and Thursday, Micron did find other analysts coming out Friday to defend the stock. Bank of America Merrill Lynch reiterated its buy rating and $100 price target. The firm sees the quick drop as a “great buying opportunity” with fears of a cyclical downturn overblown and the business environment remaining very favorable for the company.
The sell-off also saw Cowen & Co. reaffirming its bullish position, citing a healthy-looking market for DRAM and Micron’s underappreciated 3D NAND cost structure. And echoing his peers, Cascend Securities Eric Ross implored investors not to “panic sell Micron.”
Yet at the end of the day — and week, for that matter — Micron’s analyst intervention fell on deaf ears. MU stock reversed early gains, finishing up a scant 0.47% Friday. It was no match for more convinced profit-takers, bearish shorts and wounded bulls exiting in front of the company’s Sept. 20 earnings announcement.
Once again, I’ll be the first to admit I was off the mark in calling for MU stock to rally out of a confirmed double-bottom at the tail-end of August. But for bullish contrarians, Micron’s minor technical failure could always turn out to be an extreme head-fake and a great opportunity.
The fact is MU remains a notoriously volatile type of stock known for its turn-on-a-dime ability. And with shares showing an oversold stochastics set-up while testing three key layers of Fibonacci support, the possibility for a sharp turn higher can’t be denied.
Still, the risk of MU stock continuing to head aggressively lower does need to be respected. Today’s lower highs and lower lows could always be an emerging bearish trend despite our best judgement to the contrary.
Bottom line, as a MU stock bull, rather than simply buying shares of Micron and the possibility of dealing with extreme and adverse price volatility, I can use the options market to define and reduce our long exposure continues to make sense.
MU Stock Intermediate Bull Call Spread
MU stock is off about 15% since my last erroneous technical forecast. The good news is a detailed intermediate-term bull call spread is only underwater by 3% or $1.60. Further, there’s still a good deal of time to recoup the loss and even turn a profit if Micron’s price volatility takes a turn for the better. And with earnings in less than two weeks, that path could certainly be set in motion.
In looking at Micron’s options board for fresh positioning, rolling down to the Jan $52.50/$65 call spread is viewed favorably. With shares at $44.86 the vertical is priced for $1.80.
This spread begins to go in-the-money snear MU stock’s recent high, and a profit of $10.20 is possible at expiration if shares are above $62.50 and back towards the high mark of $64.66 established at the beginning of summer.
Net, net, with more than four months of life for the January contract, a couple earnings cycles built in, less than 4% of the risk associated with holding Micron shares and no additional downside exposure — this looks like a smarter risk-adjusted way to get or remain long MU stock.
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.