Established Covered Calls in Micron Technology Inc.

This morning at 9:32am just after the market opened, a short-term Covered Calls position was established in Micron Technology Inc. (ticker MU) with an October 8th, 2021 options expiration date.   A market order buy/write transaction was executed when 300 shares of Micron were purchased at $70.69 and three October 8th, 2021 Call options at the $68.00 strike price were sold at $3.19 per share.  The time value was $.50 = [$3.19 Call options premium - ($70.69 stock price - $68.00 strike price)] and a newly established initial quarterly dividend of $.10 per share goes ex-dividend tomorrow.  The Implied Volatility of these Calls was 32.5 when this transaction was executed and the Delta was 77.2 which approximates a 77.2% probability of the Call options being in-the-money at the options expiration date. 

Earnings were reported after the market close yesterday and the stock immediately declined in the after market primarily because Micron's guidance for revenue for the next quarter was 10.7% below analysts' estimates.  What the negative stock reaction seemed not to fully consider was that the guidance represents a +32% increase above the comparable quarter last year and the company is also maintaining its gross margin performance.  Based on this information, the FY22 P/E ratio would be about 9.5, an attractive valuation for a company with good ongoing prospects based on its ongoing 5G semiconductor supply prospects for the next several years. In addition, Micron's finances are strong and they have been highly rated by analysts.  Reuters Research indicates that currently 31 analysts have a Buy or Outperform rating on the stock, 4 have a Hold, and none have an Underperform or Strong Sell; and their current average target price is $108.82 (+53.9% above today's $70.69 purchase price).  I expect that as analysts re-evaluate their models for Micron after yesterday's earnings report, some will lower their price targets, but I believe these adjustments will be relatively modest and a wide margin of safety will remain. 

As detailed below, a potential return-on-investment result is +0.9% absolute return (equivalent to +32.1% annualized return for the next 10 days) if the stock price is in-the-money (i.e. above the $68.00 strike price) and therefore assigned on the October 8th options expiration date.

Micron Technology Inc. (MU) -- New Covered Calls Position

The Market Order Buy/Write transaction was as follows:
09/29/2021 Bought 300 shares of Micron Technology Inc. stock @ $70.69 per share 
09/29/2021 Sold 3 Micron Oct. 8th, 2021 $68.00 Call options @ $3.19 per share

A possible overall performance result (including commissions) for this Micron Technology Inc. Covered Calls position is as follows:
Stock Purchase Cost: $20,252.01
= ($70.69 - $3.19) *300 shares + $2.01 commission

Net Profit:
(a) Options Income: +$954.99
= ($3.19 *300 shares) - $2.01 commission
(b) Dividend Income: +$30.00 = $.10 per share X 300 shares

(c) Capital Appreciation (If 300 Micron shares assigned at $68.00 strike price at expiration): -$807.00
+($68.00 -$70.69) * 300 shares

Total Net Profit (If 300 Micron shares assigned at $68.00 strike price at expiration): +$177.99 = (+$954.99 options income +$30.00 dividend income -$807.00) capital appreciation

 

Absolute Return-on-Investment: +0.9%

= +$177.99/$20,252.01

Annualized Return-on-Investment: +32.1%

= (+$177.99/$20,252.01) * (365/10 days)