How to Profit From Wall Street’s Micron Technology Stock Flub
Experts on Wall Street have been very wrong on Micron Technology (NASDAQ:MU) this year. Not too long ago, MU caught an ill-advised sharp downgrade from an analyst calling for $35-per-share when the stock was already at price-to-earnings ratio of 7.
Consequently, MU stock corrected, which made it a blind bye. Indeed, I stepped in long on the dip so I come into today’s trade with profits in my pocket. The opportunity from here still lies ahead.
Last night, Micron reported earnings that beat on all metric expectations. More importantly, MU raised guidance going forward. The knee-jerk response was to sell, but then investors quickly realized that what management delivered was a story of strength going forward.
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Micron’s CFO delivered a stronger than anticipated guidance on all metrics and that is what Wall Street wants to see. This was a confident management team upping the ante, while we still have all the global looming uncertainties.
We now live in a world where almost all aspects of our lives almost completely depend on technology. Also, the rate of tech adoption is exponential so all the suppliers to this technology like MU will prosper for years to come.
So I can buy Micron stock at face value and risk $62-per-share with absolutely no room for error, or, and since we are in a macro environment filled with headlines of potential global tariff wars, I can use options. Using options, I can create some room for error, which will allow me to go long MU stock with conviction throughout 2018.
Fundamentally — and even after the spike in MU stock — it is still cheap from a P/E perspective. Compare its P/E of7 to Nvidia’s (NASDAQ:NVDA) P/E of 45 and Intel’s (NASDAQ:INTC) P/E of 15, for example. So the valuation of Micron stock can support much higher prices.
Year-to-date, MU stock came into the earnings event up 30%. This 4% spike offers yet another technically opportunity.
If this momentum can continue for a few days, there could be a buying frenzy. So today is phase 1 of a two-phase trade setup. In this first part, I sell downside risk against proven support to create income without any out of pocket expense. Then, in phase 2, I add a trade to capture upside potential through a debit call spread that should trigger when the price moves above $64-per-share.
The Trade: Sell the MU JAN 2019 $47 naked put and collect $2.50 to open. There is a 80% theoretical chance that I would retain maximum gains, but if the price falls below my strike, then I accrue losses below $45.50.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the MU JAN 2019 $47/$45 credit put spread. The spread has the same odds, but would deliver 25% yield on risk. Neither trade requires a rally to profit. In fact, MU stock can fall an additional 21% and I could still retain maximum gains.
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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.
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