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Greg Hogue
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I am very interested in the psychology of the market while I educate myself on matching that up with the underlying fundamentals. I want to thank everyone on SA for holding each other accountable and using the comments section to (usually) providing excellent commentary for me to make educated... More
  • Micron: Oh The Volatility! Getting Ready For Next Earnings Report 8 comments
    Feb 26, 2014 10:23 AM | about stocks: MU
    The words of wisdom that have graced this site on the topic of Micron (NASDAQ:MU) have made many Seeking Alpha readers a small fortune. I am not here to attempt to regurgitate all of their wonderful knowledge just for the page views. We've seen that before and it's downright unhelpful and borderline plagiarism.

    This article is very much bias around those bullish ideas that have been presented before. For the select few that have remained on the bear-side...well, god speed.

    What I would like to bring to everyone's attention is this simple volatility chart for Micron Call Options:

    MU:

    Micron Volatility Chart

    Can you take a guess at what happened during all those peaks? Earnings reports of course! During this entire bull run, we've seen a consistent increase in volatility starting approximately 45-60 days before earnings. We just so happen to be in that sweet spot right now.

    (Check out a simple primer on volatility here:http://www.investopedia.com/articles/optioninvestor/02/031102.asp)

    As of this writing, we are experiencing a perfectly timed pullback. Now I know not everyone loves to read the charts, but this daily chart I have my drawings on is showing that we are a third of the way up a really nice pattern line. (I'd be more than happy to share with the chart lovers out there.) The daily chart will also tell you one thing for sure: pullbacks in an uptrend like this don't last long. I'm talking three days and we've already had two.

    So, what's the play? First we need to know when earnings are going to be reported. Here's a breakdown of the time in between reports from last year:

    Q1 -> Q2 = 91 Days

    Q2 -> Q3 = 90 Days

    Q3 -> Q4 = 113 Days*

    Q4 -> Q1 = 89 Days

    *Let's chalk this delay up to the Elpida acquisition and give Micron the benefit of the doubt that they'll report 90 days from Q1:

    Q1 -> Q2 = 90 days or Monday, April 7th (My mom's 70th birthday!)

    Therefore we can automatically rule out the April 4th expiration as a sound play, so I'm focusing in on the April 19th expiration.

    My daily chart plus a slew of events posted on the Micron IR website for March lead me to believe that price could appreciate into the $27-29 range before earnings.

    If we get one more day of pullback, you can get the 26 calls for under a buck, and the 27 calls for as close to a half dollar as it'll probably get.

    Using the $27-29 price range before earnings, you're looking at a possible double on the price of those options before even accounting for volatility.

    I'm planning on buying this pullback and selling a chunk of it right before earnings to capture the volatility pricing. Historically, this has worked out quite well.

    Disclosure: I am long MU.

    Stocks: MU
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Comments (8)
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  • worldcitizen12
    , contributor
    Comments (40) | Send Message
     
    Thank you. I just bought the 26 at 0.85. Sounds a good reasoning.
    26 Feb 2014, 12:02 PM Reply Like
  • i_am_seeker_2
    , contributor
    Comments (853) | Send Message
     
    Interesting.

     

    Although in past years, Micron would report Q2 earnings at the end of March. Still, worth looking at, thanks.
    26 Feb 2014, 04:23 PM Reply Like
  • cmcsess
    , contributor
    Comments (123) | Send Message
     
    Ever since the Elpida acquisition Micron has been reporting earnings a few weeks later than in the past. What's not know is whether this is temporary while they integrate each other or if this is going to continue going forward. It would be nice to see it in March but I'm planning as if it's coming in early April.
    26 Feb 2014, 04:45 PM Reply Like
  • Bruce Burnworth
    , contributor
    Comments (2309) | Send Message
     
    Good buy plan. Just curious about selling before earnings.

     

    Before last quarter I would have agreed with you and if there is a rise in the stock up to earnings I would still agree with you. However, IMHO, if the price goes up and then starts declining or stays flat for the week before earnings, then I would hold through earnings.

     

    The market has now been sensitized to the volatility around earnings and therefore anticipates a drop after earnings so there is a sell off before earnings. If this sell off occurs before earnings, then it is likely that the increased earnings will result in a significant bump up. If there is no sell off before earnings, then there is a significant risk of a drop after earnings even with good earnings - because "they were not good enough".

     

    This at least worked at January earnings.
    27 Feb 2014, 01:29 AM Reply Like
  • Greg Hogue
    , contributor
    Comments (44) | Send Message
     
    Author’s reply » The main reason I choose to sell before earnings is to lock in the highest price of volatility. I also choose to sell a majority of my holdings so that I limit the risk of a post earnings drop, but I also don't want to miss out on a pop either.

     

    This worked well for January, and although I missed out on some profitability, I slept a lot better knowing I had locked in profit rather than a gamble on earnings reaction.

     

    If we get a beat and a pop, it appears that the best plan is to sell the remaining holdings in the first 30 minutes of action at the open to capture the remaining volatility pricing and any sell off due to profit taking.

     

    Again, March has a slew of events coming up, so I may even trim a bit there if we go up significantly, but not buy. Now is the time to be buying!
    27 Feb 2014, 02:16 PM Reply Like
  • Bruce Burnworth
    , contributor
    Comments (2309) | Send Message
     
    Oh . . . I almost forgot . . . Thank you for your post. Helpful observations and suggestions.

     

    Hopefully my few articles are not what you refer to as "downright unhelpful and borderline plagiarism." I try to add significant insight and make the information easier for newbies to understand. I especially write the articles for my friends and relatives that want to understand more about Micron.

     

    I certainly don't do it for a penny a view!
    27 Feb 2014, 01:35 AM Reply Like
  • oldbeachlvr
    , contributor
    Comments (392) | Send Message
     
    Excellent article. Very good information, and well explained.

     

    But I would play the April 19 expiration with the 25 strike rather than the 26 or 27. The 25 is (premarket 2/27) $1.17 while the other two $0.81 and $0.54. I would rather pay a little more and have the extra $ or two lower strike. Little more of a sure thing to get my money back.
    27 Feb 2014, 09:29 AM Reply Like
  • Greg Hogue
    , contributor
    Comments (44) | Send Message
     
    Author’s reply » Now that we are down around $24, I agree, the 25s have become a great buy. I'm layering the 25/26/27 with equal dollar amounts, but obviously more contracts at the higher strike prices.
    27 Feb 2014, 02:18 PM Reply Like
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