Traders rekindle old tech flame
08/17/17

Tech traders are rekindling an old flame as the sector tries for a breakout.

The Technology Select Sector Index on Wednesday climbed to its highest level since the dot-com bubble began to deflate in April 2000. It’s fought off naysayers and remained the strongest major group in the market, and is still up twice as much on the year as the broader S&P 500. 

How do traders love tech? Let us count the ways.

  1. E-commerce is triumphing over the old economy. Amazon.com (NASDAQ: AMZN)’s demolition of brick-and-mortar is the most obvious example. But there’s also a revolution underway in entertainment as streaming disruptor Netflix (NASDAQ: NFLX) soars and old-media players like Walt Disney (NYSE: DIS) languish. Same goes for social-media giant Facebook (NASDAQ: FB) and videogame makers like Activision Blizzard (NASDAQ: ATVI). Television? Newspapers? What are those?
  2. Cloud is taking over the world. Just ask Microsoft (NASDAQ: MSFT), or Oracle (NYSE: ORCL), or Autodesk (NASDAQ: ADSK), or Adobe Systems (NASDAQ: ADSK).
  3. Apple (NASDAQ: AAPL). Not sure much else needs to be said about a company with a cash hoard the size of Chile’s economy and a user base that’s twice the U.S. population.1
  4. Semiconductors are rocking and in the midst of their strongest upswing since the start of the decade.2 That’s where options traders turned yesterday, targeting a former high-flier that’s gone nowhere since the spring: Micron Technology (NASDAQ: MU).

Going to work barely an hour after the opening bell, they devoured a block of 20,000 September 33 calls for $0.45. An equal number of September 36 calls were sold for $0.13, resulting in a net cost of $0.32.

Micron Technology (MU) 1/5/17 – 8/16/17 chart

Source: OptionsHouse by E*TRADE

Calls fix the price where a security can be purchased, while selling them creates an obligation to deliver shares if a certain level is reached. Here are two possible interpretations:

  • First, the investor may have come into the session holding at least 2 million MU shares and previously sold the 33s as part of a covered call strategy. In that case, they adjusted it to the higher strike, paying a net $0.32 in hope of making an additional $3 on their stock.
  • Secondly, both legs may have been new opening transactions. If so, then the trade was a vertical call spread with the potential to earn more than 800 percent from the stock climbing less than 20 percent. (Breakeven would be at $33.32 and the position would go worthless if MU remains below $33.)

Either way, they’re bullish and looking for a move to $36 in the next month. That price point also just happens to be the stock’s long-term high in late 2014. MU closed up 3.40 percent to $30.69, and is in the midst of its best week in almost five months.

Analysts have been fondly recollecting the memory-chip maker of late. Some say there’s too much worry about an inventory glut.3 Others see its sub-niche stealing investors’ affections versus processors.4 Another gushed that MU will hold up better than peers if the bigger group stalls.5 Even old-school money manager David Tepper’s batting his eyes.6

Bottom line: MU is trying to bounce after a long pause, and traders are falling back in love. 

 

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1. CNBC: Apple's cash hoard swells to record $256.8 billion. 5/2/17. Wikipedia: List of countries by GDP (nominal). Fortune: Here’s How Many iPhones Are Currently Being Used Worldwide. 3/6/17.

2. Semiconductor Industry Association: Mid-Year Global Semiconductor Sales Up 21 Percent Compared to 2016. 8/4/17. Global Semiconductor Sales Increase 22.6 Percent Year-to-Year in May. 7/3/17.

3. Barron's: Micron: Don’t Fear DRAM Glut, Says Citi. 8/1/17.

4. Barron's: Intel, Micron, AMD Only Ones to Own as Chips ‘Plateau,’ Says Wells. 7/31/17.

5. Barron's: Micron, Everspin: Memory Taking Prominence from Processors, Says Stifel. 8/14/17.

6. CNBC: David Tepper, manager of $17 billion, loves tech stocks; here are his favorites. 8/15/17.