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Betting On a Big Move for Micron Technology, Inc. (MU)

Breaking down a long strangle on uptrending Micron Technology, Inc.

by 5/27/2014 10:35 AM
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Micron Technology, Inc. (NASDAQ:MU) is 2.3% higher at $27.95, marking a decade-plus high for the semiconductor concern. The shares are on pace to log a monthly gain of 7%, as well as their fourth straight daily gain. However, one option trader is betting on a significant move for MU -- in either direction.

On Friday, symmetrical blocks of 3,550 contracts traded at the July 27 put and July 28 call. Both sets crossed above the ask price -- the puts for $1.53 apiece, the calls for $1.42 each -- suggesting they were bought. Plus, open interest surged at both strikes over the holiday weekend, suggesting the trader established a long strangle for a net debit of $2.95 per pair of contracts.

By purchasing both puts and calls, the speculator is anticipating either a significant pullback or a rally to higher highs for MU in the short term. Specifically, the position will profit with each step MU takes south of $24.05 (put strike minus net debit) or north of $30.95 (call strike plus net debit) -- territory not charted since mid-2002 -- by the close on Friday, July 18, when back-month options expire. Risk, meanwhile, is limited to the net debit -- which translates into about $1.05 million (number of contracts x 100 shares per contract x net debit) -- should MU settle between the strikes at expiration.

From a broader perspective, now is an opportune time for option buyers to gamble with MU's short-term options. The stock's Schaeffer's Volatility Index (SVI) sits at an annual low of 32%, suggesting the equity's short-term contracts are attractively priced right now, from a historical perspective. This morning, however, the stock's 30-day at-the-money implied volatility has shot 23.6% higher to 41.2%, reflecting growing demand for short-term options.

However, while Friday's trader took the directionless road less traveled, the options crowd has been upping the bearish ante of late. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day put/call volume ratio of 0.39 stands higher than 84% of all other readings from the past year. In other words, speculators have bought to open MU puts over calls at a faster-than-usual clip during the past couple of weeks.

Echoing that, eight out of 20 ranking analysts maintain "hold" or worse opinions of Micron Technology, Inc. (NASDAQ:MU), despite the stock's quest for new highs or reports of extended contracts with DRAM customers. Should the shares continue their upward momentum, a mass exodus of option bears and/or a round of upgrades could translate into additional tailwinds for the shares.

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