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Micron Technology Speculators Expect Limited Downside

Investors are selling MU's November 5 puts

by 10/12/2012 1:53 PM
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The shares of Micron Technology, Inc. (NASDAQ:MU - 5.64) are poised to end the week with a 4.2% loss, extending their recent retreat beneath their 10-day moving average. Nevertheless, the options crowd is rolling the dice on support for the equity, which is approaching a familiar foothold in the $5.50-$5.60 neighborhood.

In afternoon trading, MU has seen around 22,000 puts change hands -- about four times its average intraday put volume, and close to six times the number of MU calls exchanged. More than half of the volume has transpired at the out-of-the-money November 5 put, which has seen roughly 11,600 contracts traded on open interest of fewer than 1,350 contracts, pointing to an influx of new positions. However, more than three-quarters of the puts have crossed at the bid price, suggesting they were sold.

By writing the puts to open, the sellers are expecting MU to remain north of $5 through November options expiration. In this best-case scenario, the puts will remain worthless, allowing the traders to pocket the entire premium received at initiation. However, should MU breach the $5 level, the puts will move into the money, and the sellers could be on the hook to buy shares of MU for $5 apiece -- a premium to what they'd pay on the Street.

From a wider sentiment standpoint, option bulls have been employing more traditional measures to wax optimistic on MU. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security sports a 10-day call/put volume ratio of 5.32, indicating that traders have bought to open more than five MU calls for every put during the past two weeks. What's more, this ratio registers in the 80th percentile of its annual range, hinting at a healthier-than-usual appetite for long calls.

Echoing that optimism, MU boasts 18 "strong buys" and one "buy" rating from analysts, compared to six lukewarm "holds" and not one "sell" or worse suggestion. In the same vein, the consensus 12-month price target on the equity stands at $9.06, implying expected upside of 58% to MU's closing price of $5.75 on Thursday.

However, as alluded to earlier, MU has struggled on the charts recently, surrendering about 5.5% so far in October. Today, the shares have given up 2.1%, after Chief Executive Mark Durcan said the firm expects to follow through with its purchase of failed Japanese memory chipmaker Elpida Memory Inc. in the first half of 2013. However, a group of Elpida bondholders say Micron's offer -- about $750 million in cash and a total of $1.75 billion paid to creditors through 2019 -- is too little for the company. A court-appointed Japanese committee is expected to make a recommendation on the issue by Oct. 29.

Daily Chart of MU since May 2012 With 10-Day Moving Average

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