To The Moon

On December 18th, Micron will release its latest earnings. Each time the company announces its earnings, it may also signal a good trading or investment opportunity.

For $Micron Technology (MU)$ earnings, key factors to observe include earnings growth, profitability, and inventory changes. In terms of revenue growth, it's important to monitor changes in memory chip prices, market share changes, and the shipment status of HBM products to determine whether the revenue rebound trend can continue.

On December 17th, Eastern Time, several major Wall Street firms updated their ratings on $Micron Technology (MU.US)$, with target prices ranging from $140 to $180. JPMorgan analyst Harlan Sur maintained a Buy rating with a target price of $180. Citigroup analyst Christopher Danely maintained a Buy rating with a target price of $150. Wells Fargo analyst Aaron Rakers maintained a Buy rating with a target price of $175. Raymond James analyst Srini Pajjuri maintained a Buy rating with a target price of $140. Oppenheimer analyst Mehdi Hosseini maintained a Buy rating with a target price of $165.

Micron's Earnings Date and Option Performance

Over the past 12 quarters, the options market has overestimated the volatility of MU stock following earnings 58% of the time. On average, the forecasted post-earnings volatility was ±7.6%, while the actual volatility averaged 6.7% (absolute value).

The implied volatility (IV30) for MU before the last earnings announcement was 59.9. After the earnings release, the implied volatility dropped to 43.0, resulting in a 28% compression. Five days after the earnings release, the 30-day implied volatility was 45.4.

Short Volatility Strategy: Short Strangle

Micron's stock price is $109.35, and the forecasted post-earnings volatility is ±7.6%.

A Short Strangle strategy is suitable when expecting a contraction in volatility, with the stock price not deviating significantly from its current level. For Micron Technology (MU), with a current stock price of $109.35 and a forecasted volatility of ±7.6%, the strategy can be implemented as follows:

1. Determine the Estimated Stock Price Range

Calculate the 7.6% volatility: 109.35 × 7.6% ≈ 8.31

The estimated post-earnings stock price range is:

Upper bound: 109.35 + 8.31 = 117.66

Lower bound: 109.35 - 8.31 = 101.04

2. Choose Option Strike Prices

Based on the estimated range, select out-of-the-money call and put options to sell:

Sell a Call option with a strike price around 118 (above 117.66)

Sell a Put option with a strike price around 101 (below 101.04)

3. Strategy Implementation

Sell one 118 strike price Call option

Sell one 101 strike price Put option

4. Profit and Loss Analysis

Maximum profit: The total premium collected from the two options, applicable if the stock price expires between 101 and 118.

Breakeven points:

Upper: 118 + total premium collected

Lower: 101 - total premium collected

Maximum risk: If the stock price breaks either of the breakeven points, there is unlimited loss potential.

5. Considerations

The actual post-earnings stock price volatility may deviate from the estimate, so it is crucial to control risk strictly.

The Short Strangle strategy benefits from a contraction in implied volatility (IV), which typically decreases after earnings, making it favorable for a reduction in option value.

Sufficient margin is required to handle potential volatility risks.