Today we’re going to talk about Micron Technology, Inc. (NASDAQ:MU). Many of my colleagues here on InvestorPlace are MU stock bulls. I would count myself among them from a longer-term perspective. Today, however, I’m going to bet against the grain … at least over the short-term. The reasons are mainly technical, but there is some real risk in buying into the MU rally right now.
First, its important to remember that semiconductor stocks have been extremely streaky in 2017. From Advanced Micro Devices, Inc. (NASDAQ:AMD) to Nvidia Corporation (NASDAQ:NVDA), red hot semiconductors have gone through short-term boom and bust period. MU stock is no exception.
Much like AMD and NVDA riding the coattails of cryptocurrency, MU has trended higher amid the current boom and positive pricing trend in DRAM and NAND flash memory. While these positive trends look to remain solid for now, they can’t continue forever. And with MU stock trading at all-time highs amid a wealth of bullish sentiment, even slightly bad news can elicit a selloff.
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Not only is MU trading at all-time highs, the shares are also heavily overbought. Currently, their 14-relative strength index is hovering just shy of 76 — well into overbought territory. In other words, there are few buyers left to push the shares higher, making MU stock weak to selling pressure and profit taking over the short-term.
Sentiment is also extremely bullish on MU stock right now. For instance, Thomson/First Call reports that 27 of the 30 analysts following Micron stock rate the shares a “buy” or better, compared to three “holds” and no “sell” ratings. While the likelihood of downgrades is slim following Micron’s recent blowout earnings report, it is still there when you consider those analysts looking at valuation.
Checking in with MU stock options activity, we find another stronghold of bullish sentiment. Specifically, the November put/call open interest ratio rests at 0.29, as calls more than triple puts among back-month options.
November implieds, meanwhile, are pricing in a potential move of more than 10% for MU stock heading into expiration on the 17th. The resulting upper bound lies at $45.34, while the lower bound rests at $36.66. MU has outstripped technical support at its 50-day moving average (near $32), but the 20-day trendline lies near $37, just above former technical support at $36.
2 Trades for MU Stock
Put Spread: Those traders looking to bet on a short-term correction for MU stock following its overbought post-earnings rally might want to consider a Nov $37/$38 bear put spread.
At last check, this spread was offered at 23 cents, or $23 per pair of contracts. Breakeven lies at $37.77, while a maximum profit of 77 cents, or $77 per pair of contracts — a potential return of 234% — is possible if MU stock closes at or below $37 when November options expire.
Put Sell: On the other hand, if you missed out on adding MU stock to your portfolio amid this run-up, and you’d like to pick the shares up at a discount to their recent highs, a Nov $39 put sell should give you that opportunity. At last check, this put was bid at $1.18, or $118 per contract.
Remember, you are selling this put not just to pocket the premium, but also as a way to name your price on the shares. If MU stock trades below $39 before November expiration, the put could be exercised and you can buy MU for $39 while keeping the initial premium of $118 per contract.
If MU stock doesn’t trade below $39 by the time November options expire, or if the contract isn’t exercised, you can keep the premium and roll your target out to the next contract month and try again.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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