Flash memory and semiconductor producer Micron Technology (MU) reported Q3 earnings last week that easily topped Street estimates. Earnings hit $1.88 per share, more than double from a year earlier and 10% greater than the consensus analyst estimate. Revenues jumped 36% from the year before and beat the estimate by $160 million. Moreover, MU expects further gains in Q4 that are well above analysts’ projections. The reaction from the Street was modestly positive, though there were some concerns over MU’s cost structure.
The stock’s post-earnings price move was anything but positive. The shares fell 5.7% the day after the report and continued lower, bottoming at a 10.6% decline in Thursday’s trading. That low brought the stock to its 200-day moving average, which hasn’t been tested since last October. Friday was an encouraging day for MU, as the stock bounced 2% higher to log its best day since earnings. The 200-day sits at the 75 level, which is where we are placing the short put of our bullish credit spread as we look for trendline support to hold. Note also that the 75-76 area has provided strong support several times throughout 2021.
If you agree that MU will stay above its 200-day moving average, consider the following trade that relies on the stock remaining above 75 through expiration in six weeks.
to Open MU 20Aug 72.5 put (MU210820P72.5)
Sell to Open MU 20Aug 75 put (MU210820P75) for a credit of $0.60 (selling a vertical)
This credit is $0.04 less than the mid-point of the option spread when MU was trading at $78.74. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will be only $1.30 per spread. Each spread would then yield $58.70. This trade reduces your buying power by $250 and makes your net investment $191.30 ($250 – $58.70). If MU closes above $75 on August 20, both options will expire worthless and your return on the spread would be 31% ($58.70 / $191.30).