This morning, a 100% Cash-Secured Put options position was established in Micron Technology Inc. (ticker MU) at the April 14th, 2022 options expiration date and the $72.50 strike price. Five Puts were sold at $.92 per share when the stock price was $77.60 (7.0% above the strike price). The Implied Volatility of these Puts was 44.8 when this position was established and the probability of assignment at options expiration on April 14th was 78.7%.
Cash-Secured Puts were established rather than Covered Calls since the Puts provided a slightly higher potential annualized-return-on-investment if assigned at expiration. I expect the primary reason for the Puts being more advantageous in this instance is that Micron's stock has declined by 17.8% so far this year. Often, for investors who have been long a stock that is declining, they become nervous about a further decline and decide to buy protective Put options below the current stock price to establish a limit on further losses. Substantial buying of these downside Puts can cause these Put options premiums to increase their Implied Volatility (at least temporarily) to slightly above that for their comparable Call options--so the time value premium of the Puts is slightly higher than that of the Calls. Since we are selling options (i.e. selling Calls for Covered Calls or selling Puts for Cash-Secured Puts), selling the slightly higher time value premiums in the Micron Puts in this case was preferable since it provides a slightly higher potential annualized return-on-investment.
As shown in the right sidebar, this is now the second position of Micron in the Covered Calls Advisor Portfolio with an April 14th, 2022 expiration date. The first position was posted here: Link
Micron reported their Q2 2022 earnings after market close two days ago (on Tuesday). Note: Micron's stock price closed at $82.05 on Tuesday, just prior to their earnings report. Their report was stellar. They exceeded analysts' estimates for both revenues and earnings and they guided next quarter higher for both metrics as well. I was very surprised that Micron's stock price has declined from $82.05 just prior to its earnings report two days ago to $77.60 this morning, so I decided to establish this Cash-Secured Puts position.
Micron's valuation is very attractive at its current price. For FY2022, Micron's earnings per share is expected to increase to about $9.54 which would be 57.4% above last year's result. This corresponds to a P/E ratio of only 8.1 which is very attractive when compared against the FY2022 average of the P/E estimates for the seven semiconductor companies with larger market caps than Micron (i.e. NVDA, TSM, AVGO, INTC, AMD, TXN, and QCOM)--their P/E ratio average being 23.3. In addition, a further increase in Micron's eps to above $12.00 per share is expected for FY2023. Finally, the 35 investment company analysts that cover Micron have a very bullish average target price of $113.25.
As detailed below for this Micron Technology 100% Cash-Secured Puts position, there is potential for a +1.3% absolute return in 15 days (equivalent to a +30.7% annualized return-on-investment).
Micron Technology Inc. (MU) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
03/31/2022 Sold 5 Micron April 14th, 2022 $72.50 100% Cash-Secured Put options @ $.92 per share.
Note: The Covered Calls Advisor does not use margin, so the detailed
information on this position and the potential result detailed below
reflect that this position was established using 100% cash
securitization for the five Micron Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Put Cost Basis: $36,246.65
= ($72.50 - $.92) * 500 shares + $3.35 commission
Net Profit:
(a) Options Income: +$456.65
= ($.92 * 500 shares) - $3.35 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Micron stock is above the $72.50 strike price at the April 14th options expiration): +$0.00
= ($72.50 - $72.50) * 500 shares
Total Net Profit (If Micron stock price is out-of-the-money (above $72.50 strike price) at options expiration): +$456.65
= (+$456.65 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If Micron stock is above $72.50 strike price at the April 14th, 2022 options expiration) : +1.3%
= +$456.65/$36,246.65
Annualized Return: +30.7%
= (+$456.65/$36,246.65)*(365/15 days)
The
downside 'breakeven price' at expiration is at $71.58 ($72.50 - $.92),
which is 7.8% below the current market price of $77.60.
