This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.
Micron Technology (MU) Dips To Support, Is It a Buy?
Micron Technology stock has been impacted by negative headline news as of late but these following two articles make a strong case for why this news is not likely to cause bearish pressure for the stock price moving forward. Micron’s China Woes May Not Be the Disaster Investors Thought and Micron Technology is rebounding after saying China ban will have minimal impact.
MU has been correcting lower since the end of May but is seen trading near an important technical inflection point, and has already shown signs of buyer’s protecting the area. The support area is derived from a rising trendline that originates back to a low printed in August last year as well as a horizontal level at $49.62. The rising trendline last triggered a bounce in May which led to a break to record highs. The horizontal level carries psychological properties as it falls near $50. The level acted as major resistance in late 2017 and is now seen as support.
If you agree there’s further upside ahead for MU, consider this trade which is a bet that the stock will continue to advance over the next six weeks, or at least not decline very much.
Buy To Open MU 17AUG18 50 Puts (MU180817P50)
Sell To Open MU 17AUG18 52.5 Puts (MU180817P52.5) for a credit of $0.98 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when MU was trading near $53. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers). Each contract would then yield $95.50 and your broker would charge a $250 maintenance fee, making your investment $154.50 ($250 – $95.50). If MU closes at any price above $52.50 on August 17, both options would expire worthless, and your return on the spread would be 62% (580% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run. Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.
As with all investments, you should only make option trades with money that you can truly afford to lose.