Semiconductor stocks have been rampaging higher, but one options trader is wary of a leading name in the space.
Micron Technology (NASDAQ: MU) has appreciated up more than 130 percent in the last year, making it the third-best performer in the Philadelphia Semiconductor Index over that period. The catalysts? Rising prices thanks to mounting orders from smartphone makers, PC manufacturers, and Big Data memory hogs.1
MU has pretty much thrashed expectations every quarter for the last year. On March 23, for instance, it reported earnings of $0.90 a share, compared with the $0.86 forecast by analysts. The company also gave forward guidance that was more than 50 percent above consensus estimates at the time, launching its shares to their highest level in over two years.2
But sometimes discretion is the better part of valor; that seems to have been the thinking behind a large MU transaction yesterday. The transaction entailed the purchase of 7,120 June 25 puts for $0.56, while an equal number of June 22 puts was sold for $0.13.
Known as a vertical spread, here’s how the strategy works:
- Owning puts fix the price where a security can be sold. In this case, the trader has a guaranteed right to get $25 for MU shares – no matter how low it may be at the time.
- Selling puts generates income but also creates an obligation to buy shares at a certain price. In this case, it’s $22.
- Combining the two lets the investor collect $3 if MU is at $22 or lower on expiration. (Sell for $25, buy for $22.)
- They paid a net $0.43 to open the position. Take that $3 and divide it by $0.43 and you get a potential profit of 598 percent from the stock falling just 20 percent.
- But there’s plenty of risk. MU must close below $24.57 simply for the trade to break even. It will become worthless if the shares stay above $25.
- While it looks like the trader is bearish overall, it’s also possible they’re looking to hedge a winning long position in the underlying shares.
Source: OptionsHouse by E*TRADE
MU ended yesterday's session up 3.14 percent at $27.63. Its next quarterly report is due around June 30, after Thursday’s puts expire. By the way, the only two other stocks in the index that have done better are Nvidia (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD). All told, the Philadelphia Semiconductor Index (lovingly called “SOX” by traders) is up 53 percent in the last year, compared with the S&P 500’s 14 percent gain during the same time frame.
Some major peers have done well this earnings season. Chip-equipment maker Lam Research (NASDAQ: LRCX) got the ball rolling with a blowout quarter on April 18 (it also guided well above the Street). Texas Instruments (NYSE: TXN) beat on Tuesday and Xilinx (NASDAQ: XLNX) shot to levels last seen during the days of the tech bubble in 2000. Intel (NASDAQ: INTC), Skyworks Solutions (NASDAQ: SWKS), and KLA-Tencor (KLAC) were on the docket to report last night.
In summary, chip makers like MU have been on fire. But one big investor is wary of potential drop in this leading name.
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1. Bank of America Merrill Lynch: Strong earnings momentum continues driven by DRAM; raise EPS and PO. 3/24/17.
2. Reuters: Micron's upbeat forecast rides on rising chip prices. 3/23/17.