[Options] O-Micron!
Buyers have been absorbing overhead supply at a key level just beneath the 2000 record highs since March. We think it is only a matter of time until this massive base resolves higher. If buyers can reclaim those all-time highs and make a sustained breakout from this base, we’re looking for a strong leg to the upside.
There aren’t many patterns we like more than multi-decade base breakouts that reclaim critical dot-com bubble highs. We want to buy these just about every time.
MU hasn’t done much on a relative basis for the better part of three years. But if it makes a sustained resolution higher on absolute terms we expect the relative ratio to accelerate higher from its basing pattern as well.
With risk so clearly defined at the 2000 highs, we want to be buyers on a breakout above 97.50 with a target of 156 over the next 3-6 months.
Today, $MU finally popped its head above our $97.50 pivot level that gets us interested in taking a bullish position.
And as you can see here, there is a lot or runway to our 3-6 month price target north of $150 per share.
But getting aggressively long by purchasing straight long calls could be problematic here, due to the implied volatility currently priced into these options. While the vol is off the highs, its still significantly above the lows:
And the premiums priced in out-of-money calls is skewed higher than similarly out-of-the-money puts.
So, to increase our odds of success as well as limit our total capital expenditure, we're going to play this bullish thesis with a spread position.
Here's the Play:
We're buying an $MU June 100/125 Bull Call Spread for an approximately $6.50 debit. This means we'll be long the 100 calls and short an equal amount of 125 calls and the net debit we pay up front represents the absolute most we can lose in this trade if we're dead wrong.
Ideally, we'll be able to exit this spread for a profit long before June expiration. My plan is to close the spread for a win when I can get $16.00 for it. This would represent capturing a little more than 50% of the maximum profit potential in this trade without having to hold the risk all the way to June. It would also be more than a doubling of our invested capital, which is nice.
As far as risk management goes, I'll be watching the $92 level. if $MU sees a close below 92 at any time during our hold, then that tells me we're too early or we're wrong. Either way, I'll want to close the trade to salvage whatever premium is left and wait for a better setup.
Meanwhile, here's a juicy tidbit of info that literally just landed on my desk as I'm typing this, courtesy Steve Strazza: The greatest trader of all time -- NANCY FRIGGIN' PELOSI -- is also long Micron calls!
Wow. What a time to be alive!
If you have any questions on this trade, please send them here.
JC and I will be doing a live twitter stream around 2:30pm ET discussing this trade. Join us if you can!
ASO subscribers who might've missed last week’s live Jam Session can catch it here.
P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.