Shares of Micron Technology (NASDAQ:MU) officially entered a bear market, dropping over 20% from the recent highs at $62.50. The reason behind the recent drop was a downgrade by Goldman analyst Mark Delaney. He lowered his price target on Micron stock to $50 based on weaker-than-anticipated DRAM pricing.
With MU stock now trading near $42, the $50 revised price target provides an 18% upside. That may be a reason to buy rather than sell at these levels.
Micron is certainly not expensive from a valuation basis. Micron stock, owing to its very lumpy income stream, always trades at a very low multiple.
The current price-earnings (P/E) ratio is approaching four and the forward P/E is below that level. Not only are these metrics low on an actual basis, they are also now at extremely low levels on a comparative basis. Micron stock is nearing a bottom just on a valuation basis.
Micron stock is also looking attractive on a technical basis. Micron is nearing major support at the $39 level, an area that has been the catapult for a rally in the past.
Nine-day RSI dipped below 20 and is at the lowest reading in the past year. Prior times when Micron stock was this oversold proved to be significant short-term lows in the stock.
Implied volatility (IV) is also at the highest levels post-earnings, another sign of that the pessimism has reached an extreme. It also means option prices are very expensive, favoring selling strategies. So to position to be a buyer of MU stock at lower levels, a bullish put credit spread makes sense.
Micron Stock Options
Buy MU Oct $35 puts and sell MU Oct $38 puts for a 50 cents net credit.
Maximum gain on the trade is $50 per spread with a maximum risk of $250 per spread. Return on risk is 20%. The short $38 strike price is structured below the $39 support area and provides a nearly 9% downside cushion to the $41.74 closing price of Micron stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at [email protected]