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Micron Technology (MU), the leading-edge memory chip design and manufacturer, will release its fiscal Q3 earnings on Wednesday, June 26. The company has said it's due to return to free cash flow profitability. This could be charging heavy put options activity.
The Barchart Unusual Stock Options Activity Report for Wednesday, June 19, shows that this stock had the heaviest options activity yesterday. Over 27,600 put options were traded yesterday at the $150 strike price expiring on June 21. That was over 89 times the prior outstanding number of contracts.
Since MU stock closed at $153.45 per share on June 18, this unusual put options activity was for a strike price that is 2.25% out-of-the-money (OTM) - i.e., below the spot price. And don't forget - they expire in just 2 days on June 21.
That presents an unusual yield opportunity for short sellers of these puts. This article will show how that works.
Heavy Put Options Activity in MU Stock
The average premium in the midpoint was $1.04. Here is what that means. The buyers of these puts expect that MU stock will fall below $149 (i.e., $150-$1.04=$148.96). Otherwise, they may not make a profit before the options expire in 2 days.
On the other hand, the short sellers of these puts can make a good yield. For example, the bid side of the trade is $1.02. So, these short sellers make an immediate yield of 068% ($1.02/$150) and the midpoint yield is 0.693%. Since they are betting that the stock will stay over $150 by the close of trading on Friday, it is a sort of bullish play.
Moreover, the investors have an advantage over the buyers of these put options. The upcoming earnings release will be after the expiration. So short sellers have an information deficit advantage over the bearish put buyers. There won't be any potential bad news related to earnings before the options expire.
Moreover, the company has provided some good news in anticipation of its earnings.
Positive Free Cash Flow Expected
Last quarter management indicated that they expect that its negative free cash flow (FCF) results in the past several quarters will turn around.
When discussing the company's outlook during the conference call, Mark Murphy, Micron's CFO, said, “We expect positive free cash flow for the second half of fiscal 2024 and project record revenue in fiscal 2025.”
Last quarter its adjusted FCF was negative $29 million. The CFO said that was near breakeven. This was a great improvement over the prior quarter's -$333 million adj. FCF. The increase in demand for its memory chips is increasing with the heavy AI and data center demand for servers and graphics cards.
For example, analysts now forecast revenue for its quarter ending May 31 will be $6.67 billion. That is 14.6% more than the prior quarter's sales of $5.82 billion and 77% more than last year's $3.752 billion.
As a result, if the company can start making a positive FCF margin, the stock could be worth more.
Analysts' Price Targets
Analysts surveyed by Yahoo! Finance have an average price target of $155.00, which is slightly higher (+1.00%) than today's price. However, AnaChart.com, a new sell-side analyst tracking service, shows that 32 analysts have an average price target of $171.19, or over 11% higher than yesterday's price.
Moreover, at least one analyst, CJ Muse, of Cantor Fitzgerald, has a $180 price target. According to AnaChart, he has hit his price targets 90% of the time. That should give investors a good deal of comfort knowing that a major analyst has such a high price target.
The bottom line is that MU stock looks cheap here. That could be one major reason why the OTM puts at the $150 strike price expiring Friday has been so popular. They are likely being heavily shorted by bullish investors.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
