MU Earnings Ahead! How to Approach Options Strategies?
$Micron Technology(MU)$ is set to release its Q4 earnings for FY2024 on September 25 after the market closes, and investors are eagerly anticipating the results. Despite recent earnings exceeding expectations, the stock has been in a pullback.
1.Market Expectations
Analysts expect earnings per share (EPS) of $1.11, total revenue of $7.65 billion, and a net income of $975.41 million.
Beyond these key figures, investors are concerned about high inventory levels and weak demand for older memory components. The market anticipates that inventory levels will gradually decline by year-end, helping to boost revenue and gross margins in the coming quarters. We’ll need to wait for the company’s guidance to see if Micron predicts a demand rebound in Q4 of this year or Q1 of next year.
Demand is expected to be driven by three key factors: an AI-driven refresh cycle in edge devices, robust performance in the data center business, and the potential for traditional server upgrades. Ultimately, the stock’s movement will heavily depend on growth prospects for the upcoming quarters, potentially outweighing the earnings report itself.
2.Micron’s Post-Earnings Volatility
In the last 12 earnings quarters, the options market has overestimated Micron’s (MU) earnings volatility 67% of the time. The predicted average post-earnings volatility is ±7.3%, while the actual average (absolute value) has been 5.7%.
In the last six quarters, Micron’s post-earnings price swings were 7.2%, -4.1%, -4.4%, +8.6%, +14.1%, and -7.1%.
Before the last earnings report, Micron's implied volatility (IV30) was at 70.8. After the earnings announcement, it dropped to 43.1, a significant decline of 39%. Five days post-report, the 30-day implied volatility decreased further to 40.5.
For investors looking to capitalize on volatility, a straddle strategy could be a good approach.
3.What is a Straddle Strategy？
When you buy a straddle, you buy out-of-the-money call and put options. The call option has a strike price above the current market price, while the put option has a strike price below it.
This strategy has significant profit potential, as the call option can benefit from unlimited upside if the stock price rises, while the put option can profit if the stock price falls. The risk is limited to the premiums paid for both options.
On the flip side, when shorting a straddle, you sell an out-of-the-money call and an out-of-the-money put. This is a neutral strategy with limited profit potential. It profits when the stock trades within a narrow range between the break-even points. The maximum profit equals the premiums received for selling the two options minus transaction costs.
4.Study Case: Short Straddle on MU
Micron Technology is currently trading at $94, and an investor believes that post-earnings volatility won’t exceed 15%. Here’s how to implement a short straddle strategy:
Step 1: Sell one put option with a strike price of $80, expiring on September 27, collecting a premium of $35.
Maximum Profit and Loss
- If at expiration, MU's stock price is between $80 and $108, both options will expire worthless, and the investor will keep the entire premium. Maximum Profit = $110 (total premium income)
- If the stock price falls below $80, the put option will be exercised, forcing the investor to buy MU shares at $80, while the stock may continue to drop. If the stock rises above $108, the call option will be exercised, requiring the investor to sell MU shares at $108, while the stock may keep rising.
Theoretical losses can be unlimited as the stock price can exceed either strike price significantly.
Break-Even Points
- Lower Break-Even Point: $80 - $1.10 (premium) = $78.90
- Upper Break-Even Point: $108 + $1.10 (premium) = $109.10
Therefore, if Micron's stock price is between $78.90 and $109.10 at expiration, the investor will make a profit. If the price falls outside this range, losses will occur.
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