Technology momentum has been unstoppable in 2017. Micron Technology, Inc. (NASDAQ:MU) is one of those stocks that have left almost no attractive points of entry from the long side. If you waited for a dip to buy MU stock, you likely missed most of the move.
When momentum stocks rally this fast, they perpetually appear at the verge of a dip. This causes most investors to wait for that dip, but it rarely comes.
That’s why I use options to trade the likes of Micron stock. There, I can virtually eliminate the need to be surgical with my timing.
Case in point? I shared a trade on MU a few weeks ago that has already delivered profits. Thing is, it’s a trade I have repeated several times, always with a safety net. All of my trades on MIcron, regardless of timing, had a margin of error larger than 10%!
I don’t like to chase price targets, but I do like to sell risk against what others fear. This allows me to generate income out of thin air — as long as my homework is solid.
Fundamentally, MU stock isn’t cheap. Its price-to-earnings ratio is three times that of Intel Corporation (NASDAQ:INTC). And unlike Intel, Micron doesn’t pay dividends. So although Micron is setting up bullishly, it’s not a slam dunk.
Click to Enlarge Technically speaking, it’s hard to discern much from rising wedges as steep as the ones Micron stock is scrawling out. But we can say that it’s vulnerable to dips. My bullish trades would have to have room for error. This eliminates buying shares at face value, where I have no buffer.
Today, I’ll show you an options trade that will allow you to effectively join the bullish herd, but from a position of relative safety. I’ll do that by identifying reliable support levels against which I can sell risk for income.
How to Trade MU Stock
My thesis: Although Micron has come too far too fast, its gains are not without merit. The future prospects for the sector are rosy given the evolution of our world. So timing aside, Micron shares are a buy for the long-term. Any bearish price pattern argument is only valid for the short term, and therein lies the opportunity: I sell risk against the extreme bearish scenario that is not likely to come.
The bet: Sell the MU Oct $24 put and collect 55 cents per contract to open. Here I have an 80% theoretical chance of success, but if price falls below my strike, I will suffer losses below $23.5.
Selling options outright is risky, so it’s not suitable for all investors. For more risk-averse traders, use bull spreads where risk is more limited.
Furthermore, Micron reports earnings in a couple of weeks, and the reaction to those can sometimes be huge. If I sell naked puts on MU stock, I could buy 6/30 $24 sacrifice puts to temporarily guard against the crash scenario.
Learn how to generate income from options here. 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 on Twitter at @racernic and stocktwits at @racernic.