[Options] Potential Reward > Risk

Sean McLaughlin
January 4, 2023

Happy New Year everyone. How are you playing it?

This morning, our analyst team was bouncing ideas around when I posed the group this question:

"It's the beginning of a new year. Do we want to continue buying strength (as we have been)? Or do we want to buy some well-selected dips on stocks in sectors we like?"

In other words, what's our appetite?

The prevailing sentiment that won out was that we have been buying strength -- and that has worked well in some areas, particularly homebuilders, Chinese stocks, and metals stocks. But the reward-to-risk opportunities right now may be more favorable in the "buy-the-dip" camp.

So with this in mind, let's take a look at a stock in the semiconductors sector that has our attention.

Here's a chart of Micron Technology $MU:

Gotta love how those levels around $49 per share were tested and held at the end of 2022. And it creates a clear risk management level for us to lever against.

JC likes being long $MU above these September and December lows and said: "By my math, the upside here is exponentially greater than any risk we are taking."

I agree, and we're going to keep it simple.

Here's the Play:

I like buying $MU July 70 calls for approximately $2.00 per contract. These calls offer up a 25 delta which means if we get the move we're looking for, the leverage embedded in these calls will play very nicely with our position, driving gains rapidly. Of course, with the potential for big profits comes an elevated probability of loss. But in this case, our risk is limited to the premium we pay today for these calls. So if we take care to size our position properly, we have nothing to fear.

Additionally, if we see $MU close below $49 per share at any time during our hold, we'll look to exit the position for whatever premium we can salvage, offering us another opportunity to limit our loss.

In the meantime, if $MU keeps ripping from here, we'll look to sell half of our calls if/when we've doubled our money. So, if we can sell half of our calls for $4.00 per contract, I'll do so. This leaves me with half of my original position, and only profits at risk. If the calls eventually end up at zero, it won't hurt me because selling half earlier at $4.00 gave me all my original risk capital back. In other words, my remaining half position is a #FreeRide. We like those around here.

If you have any questions on this trade, please send them here.

~ @chicagosean

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.

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