Micron's 2nd quarter earnings report was 4 weeks ago. Despite the excellent results, Micron's stock price remains virtually unchanged. Their future is bright since they are strong in key growth areas of SSDs, Cloud, Smartphones, Graphics/Game, and 5G with their mix of 2/3 DRAM and 1/3 NAND chips. Their 3-year CEO, Sanjay Mehrotra, is a brilliant chips engineer who has over 70 patents and co-founded SanDisk. On the earnings conference call, he was confident and visionary in describing Micron's future diversification projects and the company's focus on developing "higher margin" products. The semiconductor industry is constantly changing and highly competitive. Micron's commitment to a Research and Development-to-Revenue ratio of 13% will help them achieve their goals of developing new, cutting edge semiconductor chips.
Also, Micron's finances are strong and they are also very highly rated by analysts. Reuters indicates that currently 24 analysts have a Buy or Outperform rating, 10 have a Hold, and 1 has a Strong Sell, and their average target price is $64 (28% above the current price).
As detailed below, the potential return-on-investment result is +2.1% absolute return in 15 days (equivalent to a +50.7% annualized return-on-investment).
Micron Technology Inc. (MU) -- New Covered Calls Position
The Buy/Write transaction was as follows:07/24/2020 Bought 500 shares of Micron Technology Inc. stock @ $49.93 per share
07/24/2020 Sold 5 Micron Aug 7th, 2020 $48.00 Call options @ $2.91 per share
Note 1: The Implied Volatility of the Call options was 44.5.
Note 2: The Open Interest was only 81 contracts, but the bid/ask spread when the position was executed was narrow at only $.05 ($2.90/$2.95).
A possible overall performance results (including commissions) if the stock price is above the $48.00 strike price at expiration would be as follows:
Covered Call Cost Basis: $23,513.35
= ($49.93 - $2.91) * 500 shares + $3.35 commission
Net Profit Components:
(a) Options Income: +$1,455.00
= ($2.91 * 500 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron stock is above $48.00 strike price at August 7th expiration): -$965.00
= ($48.00 - $49.93) * 300 shares
Total Net Profit: +$490.00
= (+$1,455.00 options income +$0.00 dividend income -$965.00 capital appreciation)
Absolute Return: +2.1%
= +$490.00/$23,513.35
Equivalent Annualized Return: +50.7%
= (+$490.00/$23,513.35)*(365/15 days)
The downside 'breakeven price' at expiration is at $47.02 ($49.93 - $2.91), which is 5.8% below the current market price of $49.93.
