Micron Stock Breakout Sets Up Option Trade With Bullish Strategy

Micron Technology (MU) broke out to a new high this week and was Tuesday’s IBD Stock Of The Day. 




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Micron stock jumped 10% on Tuesday, clearing an 89.15 entry point out of a long cup-with-handle pattern. The company is ranked No. 4 in its group and has a Composite Rating of 98, and EPS Rating of 90 and a Relative Strength Rating of 87. 

With the market uptrend under pressure, investors may prefer to use options rather than outright stock purchases. 

One mildly bullish option strategy to consider is a bull put spread. To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put. 

Selling the February-expiring, 85 strike price put and buying the 80 put would create a bull put spread. This spread was trading Wednesday for around $1.40. That means a trader selling this spread would receive $140 in option premium and would have a maximum risk of $360. 

Micron Stock Trade Risk, Potential Profit

That represents a 39% return on risk between now and Feb. 18 if Micron stock remains above 85. If Micron stock closes below 80 on the expiration date, the trade loses the full $360. 

The break-even point for the bull put spread is 83.60, which is calculated as 85 less the 1.40 option premium per contract. 

This bull put spread trade has a delta of 12, which means it is a similar exposure to owning 12 shares of MU stock. This exposure, though, will change over time as the stock price moves. 

In terms of a stop loss, if the spread increased in price from $1.40 to $2.80, I would consider closing early for a loss. With earnings not due until late March, this trade should have no earnings risk. 

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

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