A couple weeks ago I wanted to make a defined risk short term play that MU had gotten a tad ahead of its fundamentals with the stock up more than 50% in less than 2 months. I bought July puts with the intent of spreading on the first pull back to reduce my break-even. The stock had not gone the way that I expected, and actually made a new 52 week high until it reversed course the first of the month.
MU is down 4% today, dramatically under-performing the SOX, and the only real news that I see is the continuation of what appears to be a recent trend of insiders selling stock (which includes outright sales or the exercising of options and subsequent selling of the stock). The screen shot from Bloomberg below shows the recent sales from insiders in just the last 2 weeks:
Of the names above, there are sales from C-level executives Mark Adams the President & Ron Foster the CFO, and board member Bob Bailey.
Now obviously I am Talking My Book at bit, but it appears that insiders can’t unload shares fast enough.
I am going to hold on to my July Puts for the time being and look to get out of most unchanged if the stock continues its slide, but I will very likely look to roll out a bit, possibly looking at Aug expiration and give the short term thesis some time to play out.
I originally chose July expiration as it would catch a handful of semiconductor earnings releases which I expect to be weak and I figured MU could trade down in sympathy as their results were already out of the way. Maybe MU insiders agree.
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Original Post June 21st, 2013: New Trade $MU: With Memory Of Past Sentiment Spikes, Fading Recent Enthusiasm
At one point yesterday, MU shares were up 50% since the beginning of May breaking out to levels not seen since late 2006, as Wall Street analysts and investors have gotten increasingly excited about the supposed lack of supply of DRAM and NAND flash memory chips which is helping MU enjoy some long lost pricing flexibility. I don’t have channel checkers in Taiwan, or contacts at computer or smartphone OEMs, but I will tell you from my nearly 16 years trading tech stocks that DRAM providers are at the very bottom of the PC supply chain as far as their ability to dictate long term pricing. I have no way to know if the recent uptick in margins that MU just reported in their fiscal Q4 Wednesday night is sustainable, but if it is predicated on their ability to charge more as PC sales are rapidly declining and Smartphone sales (at least on the high-end are leveling off) my sense would be that the stock’s YTD gains of 113% may incorporate a bit of the so called recovery.
I am not making a long term call here by any means, as it is apparent from my comments above I am not that close to the story, but the stock is hitting valuation levels not seen since pre-financial crisis, and a combination of the extreme overbought condition, recent spike in positive sentiment and my general feelings on the broad market, the stock could set up for a 10% re-tracement over the next month with no identifiable catalysts.
The 10 year weekly chart shows MU’s recent breakout above the long-term resistance at $12. That breakout led to a fast move above 14, but the ascent has gotten too steep in our view.
[caption id="attachment_27349" align="alignnone" width="637"]
10 year weekly chart of MU, Courtesy of Bloomberg[/caption]
A move back down to the $12 level (red line) would be the initial target on a pullback.
On an implied vol basis, the volatility has remained elevated after earnings because of the large call buying that has taken place in the last week:
[caption id="attachment_27350" align="alignnone" width="647"]
30 day IV (red) vs. 30 day RV (blue) in MU, Courtesy of LiveVolPro[/caption]
Realized is starting to pick up as well, and we anticipate that this could be an escalator up, elevator down type of situation.
TRADE: MU ($13.93) Bought July 13 Puts for .37
Break-Even on July Expiration:
-Profits below 12.63
-Losses of up to .37 btwn 12.63 and 13 with max loss of .37 above 13
Trade Rationale: This is a short term TRADE for a pullback to recent breakout level If the fundamentals are turning in a way that I don’t understand, then maybe a bunch of the recent upgrades will be correct and the stock sees the high teens, but my target of $11.50 -$12 in the near term would probably be just the sort of ideal entry for longs on a pull back.