A Covered Calls position was established in Micron Technology Inc. (ticker MU) with an April 14th, 2022 options expiration date. A buy/write transaction entered at a net debit of $68.24 was executed when 300 shares of Micron were purchased at $76.39 and three April 14th, 2022 Call options at the $70.00 strike price were sold at $8.15 per share.
The Implied Volatility of these Calls was 59.8 today when this transaction was executed. The primary reason the Implied Volatility of these Calls is so high is that Micron's Q2 2022 earnings report is after market close next Tuesday. Normally, I prefer to avoid earnings reports, but the range of earnings per share estimates are from a low of $1.94 to a high of $2.03 with the expected value of $1.97. This relatively narrow range indicates confidence that the likely earnings results will be reasonably close to expectations. If so, we will benefit from selling the currently elevated Implied Volatility.
Micron's price has declined dramatically (by about 20%) so far this year. It is difficult to determine when a stock decline will end, but I am relatively confident in Micron's current valuation and they are also very 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 $112.43 which is +47.2% above today's $76.39 purchase price. Also, if analysts are correct, Micron's earnings will grow by 50% this year to over $9.00 per share (a very attractive P/E valuation of only 8.5 based on today's stock purchase price).
Despite my confidence in Micron at its current price, the (1) uncertainties associated with the upcoming earnings report; (2) recent market volatility; and (3) my current cautious overall market outlook--these reasons are what caused me to select an in-the-money strike price with good downside protection. The Delta was 74.5 when this position was established which equates to a probability of 74.5% that the position will end up in-the-money at the April 14th, 2022 options expiration date.
As detailed below, a potential return-on-investment result is +2.6% absolute return (equivalent to +44.7% annualized
return for the next 21 days) if the stock price is in-the-money (i.e. above the $70.00 strike price) and therefore assigned on the April 14th options expiration date. It is possible that a small ex-dividend of about $.10 per share might occur prior to the ex-date, but since Micron has not yet declared a quarterly dividend, this possibility is not included in the results detailed below.
Micron Technology Inc. (MU) -- New Covered Calls Position
The Buy/Write transaction was as follows:03/25/2022 Bought 300 shares of Micron Technology Inc. stock @ $76.39 per share
03/25/2022 Sold 3 Micron February 14th, 2022 $70.00 Call options @ $8.15 per share
A possible overall performance result (including commissions) for this Micron Technology Inc. Covered Calls position is as follows:
Stock Purchase Cost: $20,474.01
= ($76.39 - $8.15) *300 shares + $2.01 commission
Net Profit:
(a) Options Income: +$2,442.99
= ($8.15 *300 shares) - $2.01 commission
(b) Dividend Income: +$0.00
+($70.00 -$76.39) * 300 shares
Total Net Profit (If 300 Micron shares assigned at $70.00 strike price at expiration): +$525.99 = (+$2,442.99 options income +$0.00 dividend income -$1,917.00) capital appreciation
