Micron Technology is showing the lowest level of implied volatility that we've seen in two years. That could mean it's a good time to be a buyer of volatility in MU stock.
We can do this via a strategy called a long strangle, which is constructed through buying an out-of-the-money call and an out-of-the-money put.
Buying a long strangle is cheaper than a buying a long straddle, but will still suffer from time decay. That means the options will lose a little bit of value with each day that passes if the stock doesn't make a big move.
With a long strangle, the further out in time the trade is placed, the slower the time decay, but the options are more expensive and require more capital.
For MU stock, a long strangle could be placed by buying a 90 strike call and a 75 strike put for the Sept. 20 expiration. The call was trading Tuesday around $7.85 and the put around $5.45.
MU Stock Trade Break-Even Levels
When we add the two together, the total cost of the trade would be around $13.30 per contract or $1,330.
This is the total amount of risk in the trade and the maximum that could be lost.
The break-even prices are calculated by taking the strike price plus and minus the cost of the strangle.
That gives us break-even prices of 61.70 and 103.30. But profits can be made with a smaller move if the move comes earlier in the trade. For example, the estimated break-even prices at the end of January are around 68 and 87.50.
Changes to implied volatility will have a big impact on this trade and the interim break-even prices. So it's important to have a solid understanding of volatility before placing a trade like this.
Idea Scenario For MU Stock Strangle
The ideal scenario is a large move in either direction within the first week or two of the trade.
The worst-case scenario with this MU stock long strangle would be a stable stock price. That would see the call and put slowly lose value each day. For a long strangle, I usually set a stop loss at around 20% of capital at risk, which would be around $260, and a profit target of around 40%.
Micron Technology is due to report earnings toward the end of March, and implied volatility is likely to drop after that event.
According to the IBD Stock Checkup, MU stock is ranked No. 4 in its industry group and has a Composite Rating of 60, an EPS Rating of 3 and a Relative Strength Rating of 91.
It's important to 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 X/Twitter at @OptiontradinIQ
