Name That Trade: Deja $MU

by Dan June 25, 2015 2:10 pm • Commentary

Event: Micron (MU) reports their fiscal Q3 results tonight after the close. The options market is implying a 6.25% one day move.  With the stock at $24 the June 26th (tomorrow expiration) 24 straddle (the call premium plus the put premium) is offered at $1.50, if you bought that, and thus the implied move then you would need a move above $25.50 or below $22.50 by tomorrow’s close to make money, or about 6.25%.

Price Action / Technicals: We have looked at MU on a few occasions over the last few months and to be honest, the technical situation continues to deteriorate to a point that looks downright nasty, as if the next big move will be a capitulation sell off.

The stock is down 31% from its recent highs, which was a couple percent from the 52 week and 13 year highs made in late 2014.  The two year chart below shows just how dire the recent break below $25 last month was. And in my opinion, the inability for the stock to bounce points to lower lows with little support on the chart to about the $21/$20 area:

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

$30 is obvious technical resistance, but aside from a take-out I see little reason how (or why) the stock gets back there anytime soon.

Fundamentals: MU sells its memory chips to the likes of Apple, Hewlett Packard, Samsung, Intel & Dell, with those five companies equaling about 40% of their total sales. One thing we know at this point is that PC sales are weak, and aside from Apple Smartphones, sales growth has slowed materially year over year.  About a third of their DRAM sales go into PCs and a third into Smartphones. This is has obviously been bad for MU as they lack pricing power in this sort of environment.  However, the stock is cheap if you think MU can meet low expectations for the balance of the year and believe fiscal 2016 consensus estimates for 15% eps growth and 8% sales growth are achievable.

MY VIEW:  the technical set up is horrible, but to be honest, a very hard press on the short side given how poor sentiment is.  On the flip side the set up for those who think investors will look past near term performance and think that a guide down will set the stage for a series of beats, then an entry here could make sense.  I am not in that camp as a sell off like this stock has seen in 2015 is not likely to turn on a dime. I suspect the stocks needs one last round of hate selling, on massive volume and then it could try to recover from the wash out.

Potential Trades:  I am going to keep this simple, with the stock at $24 the July expiration 24 calls and puts are both offered at about $1, if you have a directional inclination, and want to do so with defined risk that is probably the way to play. The June 26th weekly 24 calls and puts are both offered at about 75 cents.  The added few weeks would be well worth the added premium, so think of it this way risking about 4% of the underlying stock price to express a defined risk directional view into a potentially volatile event in a stock that looks poised for movement one way or the other.

As always we are weary of long premium trades into events as you need to get a lot of things right to just make money, direction, time and magnitude of the move.  The idea of targeting July expiration, rather than isolating the weeklies helps with the all of the above, and you don’t have to pay that much more for it.

We lack conviction here, so we are not gonna play.