Chip Dip

Micron Technology (MU) reported earnings on Thursday after the close, and the results were less than encouraging. Revenue was down 21% from a year ago, while earnings came in nearly a dollar less per share (though EPS did beat expectations). Profit and revenue projections for the next quarter came in well below analyst estimates. “Rapidly weakening consumer demand and significant customer inventory adjustments across all end markets” is not what you want to hear in an earnings report.

The stock did little after the report, though that may be due to news that Japan granted MU a $32 million subsidy to make chips at its Hiroshima plant. Nevertheless, the earnings and guidance news were met with a series of price target downgrades. Oddly, there was just one rating change … an upgrade. But analysts have been on the wrong side of MU for a while. The current average rating is a buy, with 28 of 31 analysts giving the stock a buy or better rating. This on a stock that is down 46% this year and just hit a 2-year low this week.

The stock is currently on a two-month slide that has pulled it 22% lower. The decline has been expertly guided by the 20-day moving average, which has not allowed a daily close above it since Aug. 18. This trendline (blue line) currently sits at 52.65, just above the short strike of our call spread. This trade is relying on the continued resistance of the 20-day and the assumption that MU’s fortunes are not going to suddenly reverse within the next few weeks.

If you agree that MU will continue to decline under the weight of the 20-day, consider the following trade that relies on the stock staying below $52.50 (red line) through expiration in seven weeks:

Buy to Open the MU 18 Nov 55 call (MU221118C55)
Sell to Open the MU 18 Nov 52.5 call (MU221111C52.5) for a credit of $0.85 (selling a vertical)

This credit is $0.03 less than the mid-point price of the spread at Friday’s $50.10 close. Unless MU sags quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $83.70. This trade reduces your buying power by $300, making your net investment $216.30 per spread ($300 – $83.70). If MU closes below $52.50 on Nov. 18, both options will expire worthless and your return on the spread would be 39% ($83.70/$216.30).