New Trade – $MU Shu Put

by Dan February 13, 2015 1:14 pm • Commentary

This morning in my Notable Options post, I highlighted some pretty heavy put activity in the Market Vectors Semiconductor etf (SMH):

SMH – saw bearish flow, when the Semiconductor etf was $55.64, a trader paid 1.03 for 45,000 March 54 puts.  These break-even at $52.97 down almost 5% on March expiration.  What’s interesting about the choice of strikes is that the etf, which INTC makes up 18% of the weight, has rallied 7.5% in the last two weeks bouncing off of important technical support at $52.

And again today, the SMH is seeing large put buying. When the etf was $56.28 a trader paid 1.02 for 50,000 March 55 puts to open, with a break-even at $53.98, down 4% on March expiration.

A quick look at the holdings of the SMH and you see that the top 5 holdings make up almost 50% of the weight of the etf: INTC 18.15%, TSM 15.6%, TXN 5.14%, ASML 5% and ARMH 5%.  What’s interesting about the choice of expiration is that all of the top holdings have recently reported results, and the only one scheduled to give a business update between now and March expiration is TXN with their mid qtr update. Obviously we have no idea of the intent of the 100,000 puts in the etf over the last couple days, possibly hedging a portfolio of semi stocks, or possibly an outright bearish bet.  But what it does do is point me in the direction of a stock like Micron (MU) that has been a massive out-performer in 2014, up more than 60% and a large holding of very skilled hedge fund investor David Einhorn of Greenlight Capital, who at one point amassed a 40,000,000 share position making him the 5th largest shareholder. 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

It seems that Einhorn is less bullish, or merely taking gains, but who knows where he stands now on the holding, and we will get a sense next week as updated 13f filings for year end should be hitting the tape.

The stock is cheap, trading at 9x expected earnings growth of about 10%, but that’s for a reason. Selling memory chips is a massively cyclical and commoditzed business, and the bottom can drop out of pricing and/or demand at any given moment.

From a technical perspective, the stock has clearly lost some momentum, with a failed breakout in early December and a series of lower lows and lower highs.  The stock was rejected today at the 50 day moving average (purple line below) and is now sitting right on its 200 day moving average (yellow line below).  I would add that the averages appear to be close to converging with the 50 day ready to cross below the 200 day, which some call the death cross signaling an impending decline (we have traded this in indicator in GOOGL read here and TSLA read here):

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

Options prices in MU look fairly reasonable near term, making expressing near term directional views with long premium strategies attractive:

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

Given the waning momentum in the space and in MU, I want to make a near term bearish trade to express the view

TRADE: MU ($31.75) Bought the April 31/26 put spread for 1.30

-Bought to Open 1 MU April 31 put for 1.68

-Sold to Open 1 MU April 26 put at .38

Break-even on April expiration:

Profits: between 29.70 and 26 of up to 3.70, max gain of 3.70 below 26

Losses: up to 1.30 between 29.70 and 31, max loss of 1.30 above 31

Rationale – If the stock fails here the chart suddenly looks precarious and if semis saw some broader weakness the stock going back to the October lows is not out of the realm of possibility. This structure has a nice payout profile if that occurs.