Options Buyers Expect an Earnings Rally for This Semiconductor Stock

There has been a heavy influx of calls bought to open ahead of MU earnings

Managing Editor
Dec 18, 2017 at 3:16 PM
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Although the pace of earnings reports have drastically slowed, a few key companies are still making their way to the stage -- with one in particular being semiconductor powerhouse Micron Technology, Inc. (NASDAQ:MU). The company is expected to report fiscal first-quarter earnings after the close tomorrow, Dec. 19, and if past is precedent, MU stock's post-earnings reaction could be positive.

At last check, Micron Technology stock was up 2.5% to trade at $43.47. Since touching a 17-year high on Nov. 22, MU shares have pulled back, but were contained around the round-number $40 level -- home to the equity's supportive 80-day moving average.

Daily Chart of MU Since Jan 2017 with 80MA

Ahead of the semiconductor maker's earnings, options buyers have been extremely call-heavy. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), its 10-day call/put volume ratio of 5.54 ranks in the 86th percentile of its annual range. In other words, speculators have been purchasing MU calls over puts at a faster-than-usual-clip during the past two weeks.

Echoing this, the stock's February 50 call has seen the biggest rise in open interest during the past 10 days, with more than 59,000 contracts added, thanks to a heavy buy-to-open skew. "Vanilla" traders purchasing the calls to open expect MU stock to topple $50 -- and reach fresh highs -- within the next couple of months.

The options market is pricing in a one-day 12.4% move for MU in the session following its quarterly report, which would outpace the equity's average day-after-earnings move of 6.4% over the past eight quarters. Micron stock rallied 8.5% the day after its late-September 2017 report. and has moved higher after three of the past four earnings releases. From its current perch, a 12.4% advance would put Micron shares at the $48.86 level -- within striking distance of new highs -- and a drop of that size would have the stock around $38.

Echoing the bullish outlook from options players, the analyst community is upbeat on Micron stock before earnings. Of the 21 brokerages covering MU, 19 rate it a "buy" or "strong buy." While the security's solid price action supports this optimistic coverage, the prevailing bullish sentiment toward MU could make it a little trickier for the shares to benefit from a big upside surprise on the earnings front.

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