Micron Technology, Inc. (NASDAQ:MU) reported earnings last night and it delivered a decent quarter. But in the spirit of this week’s stock price action, the stock fell 9% on the headline in after hours trading. It has since bounced off the lows but it is still under pressure and I want to place a bullish bet to profit from it.
Since early February, equity markets have been on edge as a slew of nasty headlines poisoned the trader sentiment. Bulls have lost the ability to sustain rallies. It’s not so much that the selling has been fierce but rather that the buyers have been hesitant to sustain rallies. And in the absence of buyers, the balance tips in favor of the sellers.
MU stock today is merely a victim of the trading environment. I believe that this is a transient situation and therein lies my opportunity. I want to bet that in the mid- to long-term, MU is a winner. We live in a world that is becoming more dependent on technology at break-neck speed. MU is one of few suppliers of this tech, so it should have a rosy future.
Late last year, MU fell almost 20% on worries over pricing pressures. Since then, the stock has recovered and broke out in a +20% rally coming into this earnings report. It helped that last quarter, management told a good story on the margins front and favorable product mixes.
This opportunity still remains in 2018 to take a bullish trade for the long-term. However, and for as long as equity markets are this nervous, I’d like to leave some room for error. While the CBOE Volatility Index (INDEXCBOE:VIX) is this high, bids are scarce so MU is vulnerable for further downside.
So although I am confident in MU fundamentals, I am a bit skeptical on Wall Street bulls for now. So I will structure my risk using options where I can create a moat between the current price and my risk. This will be a pair trade, but done in two stages.
The first would be to sell risk today into this dip. The dip in Micron stock and the high VIX cause the put premiums to be on steroids. I want to profit from what others fear. Then the second trade would be done at a later stage and once the fears abate. I add a long call position to participate in the upside potential. This is a bullish setup inside a constructive macroeconomic thesis despite the current tumultuous headlines of trade wars.
Fundamentally, MU stock sells at a single digit price-to-earnings ratio. A trailing 12 months P/E of 9 is definitely cheap in absolute terms and relative to its sector. It is about 60% cheaper than Intel Corporation (NASDAQ:INTC) and 80% cheaper than Nvidia Corporation (NASDAQ:NVDA).
Technically, MU has been in a multi-year breakout pattern that could potentially reach $70. While this may not happen in the next few weeks, in the long-term, the stock is cheap enough that it’s a likely scenario.
The Trade: Sell MU May $45 put for 70 cents. Here, I have a 85% theoretical chance of success. Otherwise, and if the price falls below it, then I would suffer losses below $44.30.
Selling naked puts is daunting, especially these days. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the MU May $45/$43 bull put spread, which has about the same odds of winning and would yield 12% on risk. Compare this with risking $58-per-share and without any room for error except a rally profit.
Subscribe to my YouTube channel for free newsletter & content here. 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.
