Where do we go from here? If it’s Micron Technology, Inc. (NASDAQ:MU), shares still look great off and on the price chart to this strategist. But in respecting difficult historical tendencies and today’s potentially overly excited investor base, a versatile and limited-risk combination spread on Micron is built and priced for the occasion. Let me explain.
Last Tuesday, Micron simply killed it with its Q4 corporate confessional. And for once in a long while, investors, other than analysts, woke up to MU stock’s very bullish cyclical underpinnings off the price chart. Now and with a key breakout in hand, momentum on the Micron price chart is in a strong position to continue delivering the goods for bullish investors.
MU Stock Weekly Chart
When I last wrote about MU stock in the immediate after-hours reaction to earnings, shares were trading up a couple percent near $35. The view was Micron had room to continue rallying and break out of a massive three-year corrective shaped cup base. The outlook was spot-on.
Since I’m familiar with classic chart patterns increasingly used as traps, the fact that MU stock is maybe too well-loved by the Street and MU’s history of volatile behavior, I offered a modified and limited-risk bullish fence in lieu of going long Micron stock as an appropriate strategy.
With shares of MU now near $39.50 after a recent high of $40.54, I still like the stock a great deal and believe it would be foolish to call a top.
One caveat to our enthusiasm is Micron’s current overbought stochastics readings and stretched position relative to its Bollinger Bands on the daily, weekly and monthly timeframes.
Net, net it makes sense to not throw caution completely to the wind as MU stock could always make life difficult for bulls’ near-term. More importantly, as we’re more focused on a more meaningful underlying shift in bullish momentum which can help promote a multiple expansion and in turn, aggressively higher prices — our solution is get long today using a more versatile Micron options combination.
The Micron Combo Trade
Reviewing Micron’s options board Thursday evening and with MU stock at $39.35, one spread package that’s setting up is buying the Nov $40/$43/$46 butterfly and simultaneously selling the Nov $36/$34 put spread for even money.
What does this bullish-oriented combination offer traders? First and at expiration, the trader maintains a profit range between $40 and $46. That’s a 15% wide profit range and just 1.65% out-of-the-money. Further, the sweet spot at $43 offers a profit capture approaching $3.00, if Micron finishes right at the short strike call on expiration.
It’s true this spread losses its profitability if Micron’s momentum reasserts itself too strongly and the stock rallies through $46. However, while I’m bullish on Micron, with earnings removed from the November cycle and that concession nearly 17% higher–I personally see it as a worthwhile risk in relation to the combination’s other benefits.
And if shares of Micron turn uglier?
For like-minded bulls also positive on MU stock’s longer-term narrative and willing to buy shares on weakness; shares would need to peel off an additional 8.5% at expiration before the spread shows any losses due to the long delta exposure. And that means picking up Micron shares when others are likely panicking, is a much easier decision to make.
Investment accounts under Christopher Tyler’s management currently own positions in Micron stock and its derivatives. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
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