Friday, August 12, 2022

Pre-Earnings Option Spread To Profit Off Micron Technology (MU)


Micron Technologies MU will be reporting its highly anticipated August quarter results next Tuesday (9/28) after the closing bell. I am looking for a springboard price action setup following what is projected to be a record quarter. The best way to take advantage of this historically big post-earnings mover is with options.

There are various bull strategies that you could utilize depending on your risk appetite and underlying assumptions about where the equity is headed. The options spread that I am presenting presumes an outsized post-earnings move with an inclination to the upside.

History is the best indicator of future performance. The prior 8 quarterly reports have resulted in an average price action of 5.2% (5 up and just 3 down). With these shares trading at a heavily discounted 6.1x P/E going into what analysts forecast to be Micron’s best year yet, I see no reason why this stock wouldn’t slingshot out of next week’s report. Still, I want to have some downside protection if things go south.

MU continues to get hammered by traders because of its adverse technical appearance. This stock looks atrocious from a technical perspective, but the fresh fundamentals that next week’s quarterly release deliver could quickly reverse its unfavorable chart narrative.

The Spread

I’m looking at a 3-legged option spread that will allow you to see endless upside gains on a rebound to the upside and still furnish you with a downside lever if the results and guidance come in below expectations.

My strategy involves October monthly options (10/15 expiration), which gives the spread holder time to let MU’s post-earnings price action play out. The spread consists of purchasing a put and a call at-the-money (or highest liquidity option near-the-money), which would be the $75 strike in this instance with MU.

The spread I have just outlined is called a straddle. This spread is typically utilized prior to a catalyzing event that is sure to move the stock, but you are unsure of the direction. Straddle spreads have expensive entry costs or premiums because you combine the costs of both the put and the call.

I am adding one more component to this spread, making it a little less expensive and more bullish. Selling an out-of-the-money MU put at $70 will offer you a decent credit to lower the initial cost of the spread while still allowing you to (marginally) profit from a downside move.

To sum it up, you would be purchasing all monthly October options: a $75 strike call for $225, a $75 strike put for $325, and would sell a $70 put contract for $125, equalling a total initial cost of $425. However, you are not actually risking this much, and you can see this represented in the Options Profit Calculator’s P&L breakdown.

The P&L chart below exhibits profitability levels at each indicated exit date, represented by the different color lines.

Options Profit Calculator

Options Profit Calculator

Image Source: Options Profit Calculator

These options are currently trading on depressed pre-earnings implied volatility (IV), meaning that the presumed outsized price move from this upcoming quarterly report isn’t fully priced in. If we get a big move, we will see IV jump either way (up or down), resulting in our premiums rising, giving us an even larger upside to our long contracts (puts and calls).

Final Thoughts

Micron, the leading US memory chip-making powerhouse, controls 23.1% of the DRAM market and 11.1% of NAND, which are the most prominent memory markets in the economy today. In August, MU slipped into a bear market following a slew of downgrades from analysts predicting the (temporary) peak in memory chip growth. These downgrades pushed MU far below its intrinsic value and set it up for this option spread strategy I am presenting you today.

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