Monday, June 22, 2015

MU Analysis

Update 6/30/2015: MU's price dropped sharply after earnings were published. Bloomberg reported that the company's outlook was for slumping demand for its memory chips. After giving the price a few days to rebound, I exited for a loss.

Shares declined by 23.5% over eight days, or a -1,073% annual rate. The options position produced a -86.4% loss on debit, for a -3,942% annual rate.

One reason for exiting quickly is the nature of Elliott wave analysis of the chart, which shows MU in the 3rd wave of a 3rd wave of a downtrend. That position within the wave suggests that it has some time to go before it is complete.

Click on chart to enlarge.
MU 1 year daily bars

Update 6/24/2015: MU changed its earnings publication date from Monday to Thursday after the closing bell. Since I've already entered the position, I need take no additional action. The price has moved little this analysis was posted, and implied volatility has risen to 40.9%.

The semiconductor manufacturer Micron Technology Inc. (MU), headquartered in Boise, Idaho, publishes earnings on Monday after the closing bell.

In my analysis, I shall use the JUN4 Weeklys series of options, which trades for the last time on June 26, four days hence, and the JUL monthly series, which completes trading on July 17, 25 days from now.

[MU in Wikipedia]



Click on chart to enlarge.
MU at 10:57 a.m. New York time, 90 days 2-hour bars
On average over the past 12 months, MU's price has gapped 91 cents after earnings were published. The largest gap in the period was $2.27.

MU's implied volatility stands at 38.8%, which  is at its lowest level since 2006, before the Great Recession began. Relative to the most recent lowest low in mid-May and the recent lower high, implied volatility is in the 94th percentile. Calculated from the high point of the past 12 months, volatility stands at the 33rd percentile.

As always, there is no absolute answer to the question, "How high?" The viability of the relative implied volatility will become clear as I try to construct a position.

MU's volatility is 3.1 times the VIX, which measures the volatility of the S&P 500 index.

I've used the JUL options series in calculating the standard deviation ranges implied by options pricing.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, average earns move

The Trade

In constructing the trade I look at the downward bias of the chart. The one standard deviation range is wider than the earnings range in both directions. It is narrower than the chart range at the top.

So I'll want to be providing an ample zone of profit to the downside. The Strangle described below will cover a $3 gap, which which triple MU's average and 73 cents more than the widest gap.

Strangle, short the $27 calls and long the $20 puts,
sold for a credit and expiring July 18
Probability of expiring out-of-the-money


The premium is $31. The stock at the time of purchase was priced at $24.51.

The best coverage an iron condor will provide places the entire earnings range within the zone of profit, but leaves the one standard deviation range unprofitable at both extremes.

Iron condor, short the $27 calls and long the $26 calls,
short the $23 puts and long the $22 puts,
sold for a credit and expiring June 27
Probability of expiring out-of-the-money


The risk/reward ratio is 2.5:1. The premium is $0.28. The stock at the time of analysis was priced at $24.49.

Decision for My Account

I've opened a Strangle in MU as described above. I've declined to enter an iron condor position because of the high risk/reward ratio.

-- Tim Bovee, Portland, Oregon, June 22, 2015


My volatility trading rules can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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