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Friday, July 28, 2017

Established New Position in Micron Technology Inc.

Today, a new position was established in Micron Technology Inc. (ticker MU) by selling ten August 18, 2017 100% cash-secured Put options at the $28.00 strike price.  The short Puts were chosen instead of the comparable covered calls since the potential return-on-investment result was slightly higher for the Puts in this instance.

The implied volatility of the Put options has increased during the past few days to its current very high level of 42.7 when this position was established; so the $.71 price received per share received when the Puts were sold is a very nice premium to receive for these out-of-the-money Put options (i.e. strike price below the current stock price).  Although Micron stock has already risen by 30% so far this year, Micron was hit with a double whammy to its stock this week.  First, Seagate released a lousy earnings report on Tuesday and Micron's stock also sold off in sympathy.  Second, a Barron's article yesterday speculated that Micron's recent good results might reverse soon, especially if Samsung were to flood the market with additional chip capacity.  Although Barron's is often insightful, the Covered Calls Advisor disagrees in this instance; instead believing that the prospects for Micron remain strong at least through the end of this year.  With this week's sharp sell-off, the stock is now a great value both on a fundamental basis (current P/E of only 6.2 on this year's expected earnings) as well as oversold on a short-term technical basis -- today's RS(2) =14.

As detailed below, for this position there is potential for a +2.5% absolute return in 22 days (equivalent to a +41.7% annualized return-on-investment).

Micron Technology Inc. (MU) -- New 100% Cash-Secured Puts Position
This position was established when the price of Micron Technology Inc. was $29.15 (3.9% downside protection to the strike price) and 22 days remaining until the options expiration date.

The transaction today was as follows:
07/28/2017  Sold 10 MU Aug 18, 2017 $28.00 100% cash-secured Put options @ $.71
Note: the price of Micron's stock was $29.15 today when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and a potential result shown below reflect the fact that this position was established using 100% cash securitization for the ten Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $28,004.95
= $28.00*1,000 shares + $4.95 commission

Net Profit:
(a) Options Income: +$703.30
= ($.71*1,000 shares) - $6.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron Technology Inc. is above $28.00 strike price at August 18th expiration): +$0.00
= ($28.00-$28.00)*1,000 shares

Total Net Profit (If Micron stock price is above $28.00 strike price at August 18th options expiration): +$703.30
= (+$703.30 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If Micron stock price is above $28.00 strike price at August 18th options expiration) : +2.5%
= +$703.30/$28,004.95
Annualized Return: +41.7%
= (+$703.30/$28,004.95)*(365/22 days)

The downside 'breakeven price' at expiration is at $27.29 ($28.00 - $.71), which is 6.4% below the current market price of $29.15.

The probability of making a profit (if held until the August 18, 2017 options expiration) for this Micron Technology Inc. short Puts position is 67.1%. This compares with a probability of profit of 50.2% for a buy-and-hold of Micron shares over the same time period. Using this probability of profit of 67.1%, the expected value annualized return-on-investment (if held until expiration) is +28.0% (+19.2% * 67.1%), a satisfactory risk/reward profile for this relatively conservative investment.  

The 'crossover price' at expiration is $29.86 ($29.15 + $.71).  This is the price above which it would have been more profitable to simply buy-and-hold Micron Technology stock until the August 18, 2017 options expiration date rather than selling these Put options.

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