Micron Technology is set to report earnings today after the close, with an expected move of around 8.8%.
The stock recaptured the 21-day exponential and 200-day moving average lines Monday. Following the last earnings report on Dec. 20, MU stock moved up around 10.5%.
Let's analyze how we can structure an option trade that fits the view that: 1) We think MU stock will stay within the expected range. And 2) The response to the earnings report is likely to be positive.
Taking the at-the-money put and call for the April 1 expiration, we see that the expected range is 8.8%.
Now that we know the expected range, let's find a bull put spread with a short strike roughly 8.8% below the stock price.
Selling the April 1 expiry, 73-strike put and buying the 68 put would create a bull put spread.
Return Of Nearly 15% If Trade Works Out
This spread was trading for around $0.65 per share Monday. That means a trader selling this spread would receive $65 in option premium with a maximum risk of $435.
That represents a 14.94% return on risk between now and April 1 if MU stock remains above 73.
If Micron closes below 68 on the expiration date, the trade loses the full $435.
The break-even point for the bull put spread is 72.35, which is calculated as 73 less the 0.65 option premium per share.
There is little room for adjustment with short-term trades such as this held over earnings. Short-term trades also contain assignment risk.
Traders Could Lose 100%
A 15% return in a few days would be nice, but the possibility of losing 100% is also very real.
As such, this style of trade is only for traders with high risk tolerance and investors should use appropriate position sizing.
Depending on how MU stock trades today, traders may prefer to wait for a price higher than $0.65 for the spread.
According to the IBD Stock Checkup, MU stock is ranked No. 6 in its group and has a Composite Rating of 80, an EPS Rating of 91 and a Relative Strength Rating of 45.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
