The stock market has been hostage to global tariff war headlines over NAFTA and, more importantly, with China. The U.S. is trying to set more favorable trade deals with the world. Some sectors are more sensitive to these headlines than others.
Technology companies like Micron (NASDAQ:MU) are heavily hit by these headlines. MU stock has been trading in an exceptionally violent way lately. It has had multiple moves larger than 30% in just the last 12 months. And this is a stock that doesn’t have much froth in it.
So therein lies the opportunity today. I see a chance to scalp another winning trade off what I deem decent value. There are experts on Wall Street who suggest Micron stock is a value trap, meaning even at this tiny price-to-earnings ratio, it could still get much cheaper. While that is a possibility, I think I can profit off of what others fear by using the options market.
Instead of risking $44 per share and buying the stock then hoping for a rally to profit, today I sell downside risk against an already beaten down MU stock to generate income without any out of pocket expenses.
The worst-case scenario in this trade is that I would own shares at a 15% discount from current price. Keep in mind that it has had a 30% correction since its highs in may. So for the long run I am confident that I will be able to manage out of the shares for a profit.
We now live in a world that depends heavily on technology. With the advent of the cloud and the smart phone, almost everything we do requires semiconductor parts or services which come from companies like MU stock.
So I see a profitable future for almost all those suppliers today. Meaning regardless of what one particular aspect of micron’s product line may do, the company overall will prosper for years to come.
Fundamentally it sells at a 4 price-to-earnings ratio, so any corrections from here will be cutting into bone. Compare that to Nvidia (NASDAQ:NVDA) which sells at a 34 P/E or Advanced Micro Devices (NASDAQ:AMD) which loses money. Unless the whole market corrects sharply, Micron stock should start to see support around $40 per share.
Technically, it is lagging while the stock market is up, but more importantly it is bumping along a support zone that needs to hold else there would be another leg lower.
MU Stock Trade Ideas
The Trade: Sell the MU JAN 2019 $35 naked put for $1.50. This is a bullish trade where I have an 80% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $33.50.
Selling naked puts carries big risk, especially for a momentum stock like MU. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the MU JAN 2019 $35/$33 credit put spread. The spread has the same odds but would deliver 20% yield on risk. Neither trade requires a rally to profit. In fact the stock can fall an additional 19% and I could still retain maximum gains.
I merely need MU stock to hold its support for the next few months. I am betting that the value in the stock will prevent sellers from taking it too far. And of course, if they do, then I own the shares at a discount from here.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
