Yesterday, the stock market set yet another all-time high, and Micron Technology, Inc. (NASDAQ:MU) played a large role in the markets’ strength. On Thursday, MU reported earnings, and this morning shares of the chipmaker opened down sharply.
MU beat both on the top and bottom lines emphatically, so the knee-jerk reaction from traders was to spike Micron stock. Micron then reversed course during the conference call as management committed the cardinal sin of guiding lower. Micron raised concerns over gross margin pressures, so the exuberant current quarter metrics quickly flipped to being worries about the company’s direction.
It is utterly unreasonable.
The consensus is now that it is a value trap. But therein lies the opportunity. This is the perfect stock opportunity where I can generate income without any out of pocket expenses.
Fundamentally, MU already trades at 4 price-to-earnings ratio so it’s already shed a lot of froth. There is nothing but bone which makes the downside risk minimal.
Experts are worried that NAND and DRAM prices are falling, but I’ve heard so many experts say that it is already priced into the stock. So, I am confident that I will profit from owning the shares, especially if at a deep discount.
The fact that investors bought the earnings headline at first tells me that most agree and are looking for reasons to buy. So with time, their fears will abate once more and the selling will stop.
Management guided lower because they were just hit with Trump’s new $200 billion tariff, so they have to note it as a worry. This is good management, not a reason to flee the stock. Hedging cost pressures from extraneous circumstances reveal a “heads-up” management style, which is a team I can bet on.
Let’s not forget: We still have a favorable macroeconomic environment for growth! The trade war with China is real, but I believe that the U.S. and China will come to an agreement in the next few months. Both sides have too much at stake to let it linger past December. So I want to profit from what others are fearing this morning.
This is a rinse-and-repeat trade for me that I’ve shared several times before. MU stock has little froth to shed, so the downside is finite.
MU Stock Options
Technically, MU stock has a support band around $40 per share, so it’s likely to hold here. But if it fails, it could ignite a second wave of selling for another $5 lower from there.
Experts on Wall Street are confused as their price ranges are wild. Yet, analysts are largely optimistic, and Micron stock is selling well below their estimates. This raises the risk of analyst downgrades.
The Trade: Sell MU Nov 2 $40 naked put. This is a bullish trade where I collect $1 to open. Here I have an 80% theoretical chance of success. But if the MU stock price falls below my strike then I accrue losses below $39.
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 MU Nov 2 $40/$38 bull put spread where I have the same odds of winning. Then the spread would yield 20% on risk.
Today’s trade, although it would benefit from one, doesn’t need a rally to profit. 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 too far. It is important to know that if they do, then I want to own the shares at a discount from here.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters.
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.
