Scalp a 47% Payout by the End of This Week with Micron (MU) Call Spreads

It’s time to face reality: Micron Technology’s MU latest earnings report didn’t quite cut the mustard. Following the company’s fiscal third-quarter disclosure, MU stock fell slightly more than 18% as a response. Still, the ugly print is now yesterday’s news. That means there’s a possibility that in the short term, Micron’s equity can at least stabilize.

According to Barchart contributor StockStory, the memory chips manufacturer’s revenue and earnings-per-share guidance for the current quarter missed targets significantly. “The weak outlook was driven by three main factors: a slowdown in demand for data center SSDs, slower-than-anticipated inventory absorption in consumer markets such as PCs and smartphones, and an industry-wide oversupply of NAND memory.”

Still, it may be that the market overreacted to the news. For one thing, StockStory reported that “Micron achieved a notable improvement in its inventory levels, and its adjusted operating income exceeded Wall Street's forecasts.” Further, while the company slightly missed Q3 revenue expectations, it did post EPS of $1.79, beating the consensus view of $1.77.

Sure, the current-quarter guidance wasn’t pretty. However, the loss of nearly 15% of equity value in the business week ending Dec. 20 might seem a tad bit overdone. After all, management delivered some positives in a clearly challenging environment.

Given this fundamental backdrop, MU stock may at least be due for a modest tick higher. If so, a near-term bull call spread looks awfully enticing.

Stack the Odds in Your Favor with a Barchart Premier Membership

Every week, I pound the table regarding the merits of a Barchart Premier membership. I genuinely believe it’s the best deal around for retail traders because it helps to stack the odds in your favor.

First, the company’s proprietary Options Screener represents a massive timesaver. With tens of thousands of compelling options strategies to choose from, it’s practically impossible to filter through them manually. With the Options Screener, you set the parameters for the ideas you’re looking for and Barchart does the heavy lifting. And that’s exactly how I came across the idea for MU stock.

Second, Premier members enjoy access to historical data, allowing investors to dive deeper into their prospective transactions. For example, with MU stock, I downloaded its weekly price history over the trailing five years. From there, I calculated the baseline probability of Micron shares hitting a return of 0% or greater, which came out to 52.63%.

For those interested in the math, I took the number of non-negative returns divided by the total weeks of returns. Notably, the specific trade I was looking at — the 89/90 bull call spread for the options chain expiring Dec. 27 (this Friday) — features a probability of profit of 53.9%. Barchart likely calculates the odds slightly higher because the breakeven point ($89.68) is below Friday’s close of $90.12.

Plus, the short call strike of $90 means that MU stock doesn’t need to move higher from here. Instead, by Friday, the price just needs to not fall below $90. Do that and the maximum payout of 47.06% is yours, which ain’t bad for one week’s worth of speculation.

However, it gets even better. While the baseline odds are slightly better than a coin toss, the conditional probability — specifically the likelihood of a flat or positive return following a one-week loss of 10% or greater — suggests that speculators should consider betting on MU stock. Again, for those interested in the math, the formula is below.

P(A∣B) = P(A∩B) ÷ P(B), where:

• P(A∣B) means "the probability of A happening, given B has already occurred.
• P(A∩B) is the probability that both A and B happen at the same time.
• P(B) is the probability that event B happens.

By running the numbers, we arrive at the conclusion that there’s a 66.67% chance that MU stock will at least not lose value in the coming week.

But Wait, We’re Still Not Done with MU Stock!

When applying conditional probabilities, you essentially have two-thirds odds of winning with the aforementioned 89/90 bull call spread; that is, buy the $89 call and simultaneously sell the $90 call. We’re not trying to swing for the fences here. Rather, we’re just trying to get guys on base with smart, timely hitting.

But what should really seal the deal is that practically speaking, the odds are better than 66.67%. Because the short call strike is 0.13% below Friday’s close, MU stock could technically lose value — albeit not much — and still produce the maximum reward.

What’s more, the breakeven price is roughly half-a-percent down from Friday’s close. Based on interpolation, the odds of at least partial success may land at around 70%.

Of course, there are no guarantees in the market. However, rather than relying on subjective interpretations of chart patterns, investors can use empirical data combined with Barchart Premier’s options trading tools to guide the decision-making process. Be sure to check out all that membership offers to stay ahead of the curve.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policyhere.

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