While the Nasdaq composite was in a corrective phase over the last couple of months, it didn’t hit all the technology stocks the same. One group that held up particularly well was the data storage group, including number-one ranked MU stock.
Micron Technology (MU) was recently listed as one of 22 of the fastest growing stocks expecting a greater than 50% increase in earnings per share this year.
MU stock is holding above rising 21-, 50- and 200-day moving averages. Look at it compared to the Nasdaq composite. While the Nasdaq composite struggled underneath its 50-day moving average line, Micron stock quickly got support at that level.
Micron is also showing excellent stock ratings with a Composite Rating of 98, an EPS Rating of 96 and an RS Rating of 82.
Let’s take a look at a bullish option trade on MU stock known as a bull put spread.
To execute a bull put spread an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Bullish MU Stock Option Trade
Traders who think Micron stock will not drop below 90 could look to sell a 90 put and buy an 85 put, both with May 21 expirations.
Tuesday, this spread was trading for around $1.60. A trader selling this spread would receive $160 in option premium and would have a maximum risk of $340 (distance between strike prices minus the premium received).
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That represents a 47% return on risk between now and May 21 as long as MU stock ends above 90 at expiration.
If Micron stock closes below 85 on the expiration date the trade loses the full $340.
Profit And Loss Areas
The break-even point for this bull put spread is 88.40. That’s calculated using the strike of the short put at 90 less the $1.60 option premium per contract.
If the spread value rose from $1.60 to $3.20, I would look to close the trade early for a loss.
This bull put spread trade has a delta of 14. It has similar exposure to owning 14 shares of MU stock, although this exposure will change over time as the stock price moves.
Micron Technology just reported earnings on March 31. The next report is expected at the end of June so this trade would have no earnings risk.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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