Name That Trade – $MU Shu Pork

by Dan January 6, 2015 11:24 am • Commentary

Micron (MU) reports their fiscal Q1 results tonight after the close.  The options market is implying about a 7% move between now and Friday’s close, the Jan 9th weekly 33.50 straddle (stock ref $33.50) is offered at $2.40, if you bought that you would need a 7% move in either direction to break-even.  The average one day move following the last 4 quarterly reports has been about 6.6%.

On last night’s Fast Money on CNBC I highlighted a bullish roll in calls, where a trader sold 3700 Jan 35 calls at 96 cents to close when the stock was $34.07 and bought 3700 July 35 calls for 3.65 to open:

What I find interesting about this trade is that the premium that was purchased, was more than 10% of the underlying stock price, so the trader paid $3.65 for the right to own MU on July expiration at $35, seems a bit hefty no?

From a technical standpoint, the stock has been in a fairly long and wide base between $30 and $35 for the back half of 2014:

MU 1yr chart from Bloomberg
MU 1yr chart from Bloomberg

It would be my sense that disappointing results, coupled with weaker than expected guidance could see a re-test of the lower end of the recent range, back towards the stock’s 200 day moving average, just below $31.  On the flip side, I suspect it would take a meaningful and unexpected beat and raise to have the stock finally breakout and hold above the 52 week highs made in early Dec at about $36.50.

As far as the choice of the July 35 strike, and the willingness to risk 10% of the underlying stock price in premium, well, maybe the trader is looking at the 15 year chart, with the stock threatening an epic breakout of the 2002 high:

MU 15 yr chart from Bloomberg
MU 15 yr chart from Bloomberg

As far as the price of MU options, they are clearly elevated heading into the print while a bit below the October levels. Although, it is important to note that when the company reported in October the market was in the midst of what was the worst sell off in more than a year, with overall vol levels high:

MU 1yr chart of 30 day at the money IV from Bloomberg
MU 1yr chart of 30 day at the money IV from Bloomberg

Thirty day at the money implied vol should decline 30% post the report.

From where I sit, and given my history trading the semiconductor / memory space over more than 17 years, stocks like MU that trade at a dramatic discount to their peers and the broad market do so for a reason. Even after the massive gains the stock has had over the last couple of years.  They do so because they are highly cyclical while rarely possessing too much pricing power as their product has been massively commoditized.  MU has been a darling of the hedge fund community over the last year or so, with one of the best, David Einhorn of Greenlight Capital at one point amassing a 40,000,000 share position. It is interesting to note that in the latest 13F filing on September 30th that Greenlight has sold a quarter of the position, and possibly more since.

From Bloomberg
From Bloomberg

This may come as a surprise to some, but I don’t like the risk reward for a long entry at current levels for investors, as I suspect we see $30 in the coming weeks.