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
were sold is a very nice premium to receive for these out-of-the-money
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
Micron Technology Inc. (MU) -- New 100% Cash-Secured Puts Position
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
(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%
Annualized Return: +41.7%
= (+$703.30/$28,004.95)*(365/22 days)
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
profit of 50.2% for a buy-and-hold of Micron shares over the same
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.
'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.