Name That Trade – $MU: Huge Loss of Memory

by Dan June 26, 2015 1:01 pm • Commentary

The nearly 19% drop today in shares of Micron (MU) is staggering. Especially for a stock that came into the trading session down 30% from its 52 week highs, and is now down 45% on the year.  I have said this on numerous occasions this year about MU, just as a stock like this overshot on the upside, it can and will do so on the downside.  Here was my take yesterday in my our quarterly preview:

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

I am not taking a victory lap on my directional take, in hindsight it seemed kind of obvious, and after all I did not have the conviction to trade it.  But now I think it is important to consider what’s next? I have gotten a lot of questions about where would be good level to step in.  A quick look at the 3 year chart below shows the stock’s break of the round number support of $20, quickly approaching the next identifiable support at $19 and below that is another air-pocket to the mid teens:

MU 3yr chart from Bloomberg
MU 3yr chart from Bloomberg

Given the massive gap an the massive uptick in realized volatility, implied volatility, the price of options, has not come in as much as one would expect, but they should as the stock finds a bottom:

MU 1yr chart of 30 day at the money Realized Vol (white) vs Implied vol (blue) from Bloomberg
MU 1yr chart of 30 day at the money Realized Vol (white) vs Implied vol (blue) from Bloomberg

I have gotten the question on more than one occasion today, where to step in?? If I were inclined to play MU for a bounce I would look to finance some longer dated calls, selling July that should see prices come in and targeting a possible beat and raise in their next report that should come in late September in Oct expiration:

Hypothetical Trade: MU ($19.50) Buy July / Oct 21 Call calendar for .85

– Sell 1 July 21 call at .20

– Buy 1 Oct 21 call for 1.05

Breakevens on July expiration: Best case scenario the stock finds its footing and slowly works its way back towards 21 by July expiration. Losses if it continues lower or suddenly rips higher.  Max risk is 85 cents.

Rationale – If this is indeed the washout I predicted yesterday it could finally be the time to step in and buy.But you don;t just want to do that in the stock in case you’re wrong. This trade defines your risk and even plays for the fact that a turnaround in the shares is unlikely to happen immediately. If the July options expire worthless you’re then left with an earnings play in addition to having the entire Summer and part of the Fall for this stock to begin working higher.

Are we there yet? Probably not, but a washout on massive volume followed by the stock holding $20 would be encouraging and could cause me to take a shot, with defined risk.