Semiconductor convoy keeps on rolling
10/17/17

As the broad market continued hitting new highs last week, the semiconductor industry specifically saw quite a bit of bullish activity in chipmakers Nvidia (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD), as well as chipmaker supplier Applied Materials (NASDAQ: AMAT).

The enthusiasm in the semiconductor industry is spreading to other names as well. From a stock chart, it’s clear Micron Technology (NASDAQ: MU) has been a semi on a roll:

Micron Technology (MU) 11/16 - 10/17

Source: OptionsHouse by E*TRADE

There could be many reasons why traders are so bullish on Micron, but the most obvious is the strong earnings they announced a few weeks ago. Micron reported revenue of $6.14 billion, well above Wall Street’s expectations. Furthermore, they raised their expectations for Q1 2018.1

Options traders are also finding a way to hitch a ride on Micron's bull run. On Monday morning, options traders bought a bull call time spread looking for MU stock price to continue higher.

  • Traders bought 30,000 MU October 40 calls for $1.13.
  • They concurrently sold 30,000 MU November 44 calls for $0.73.
  • Taken together, the net position is an Oct40/Nov 44 bull call spread for $0.40 ($1.13 – $0.73).

Since traders bought the Oct 40 calls, they have the right to buy MU shares at $40 per share on or before October expiration. However, traders also sold the Nov 44 calls, which means they are obligated to sell MU shares at $44 per share on or before November expiration.

Using the OptionsHouse by E*TRADE Snapshot Analysis, before expiration the risk/reward options graph looks like this:

Micron Technology risk/reward before Oct. expiry

Source: OptionsHouse by E*TRADE

With this bull call spread, before the October expiration, traders have contained risk to the downside, since their loss is limited to the premium they paid for the spread. That cost of $0.40 is the entirety of what they stand to lose should the stock drop below $40.

If MU remains above $40 by the October expiration, then the Oct 40 calls will be exercised and the traders will now own MU stock. Again turning back to the Snapshot analysis, the new risk/reward options graph after expiration will look like this:

Micron Technology risk/reward after Oct. expiry

Source: OptionsHouse by E*TRADE

After expiration, if the traders end up owning MU stock, they will have downside risk. They will also have capped their upside profit potential above $44. However, with the bull run Micron has experienced over the past year, traders are apparently comfortable with that risk, and with the bull call time spread traders think that Micron will continue to keep rolling to the upside.

 

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1. Wang, Christine. "Micron shares rise after earnings beat," CNBC, 26 Sep. 2017. https://www.cnbc.com/2017/09/26/micron-earnings-q4-2017.html