Micron Technology Huge, Unusual Put Option Activity - a Bullish Signal as MU Rises 12%

Micron Technology (MU) stock has been on a tear. It's up 100% since a recent trough on March 30 and is still rising, up over 10% today again. That has pushed MU put option premiums sky high. As a result, a Barchart report today shows unusual out-of-the-money (OTM) MU put option activity. That's a bullish signal, as this article will show.

MU is at $645.80, up over 12% today alone, as its options volume is soaring, as CNBC reports. I discussed Micron's upside potential in a Barchart article on April 14. Since then, analysts have hiked their price targets again.

In fact, MU stock is well over analyst price targets. For example, Yahoo! Finance shows an average price target (PT) of $551.40 from 44 analysts, and Barchart's mean analyst survey PT is $562.20. My own price target is $620, as seen in an April 27 Barchart article.

Huge options trades are pushing the stock higher. This is seen in today's trading.

Unusual Put Options Trade in MU Stock Today

A Barchart report shows that one particular put option tranche expiring May 15 has trading volume over 36 times the prior number of put option contracts outstanding. This can be seen in the Barchart Unusual Stock Options Activity Report today, as shown below.

It shows that over 5,300 put contracts have traded at the $600 put strike price expiring in 10 days on May 15. That put strike price is 7% below today's spot trading price, and implies that institutional investors likely initiated this trade as a short-put play. 

That means they sold short $600 put strike price options and collected $18.82 per put option sold short this way. This works out to a 10-day yield of 3.136% (i.e., $18.82/$600.00).

How This Works

The way this works is that the institution must first secure $60,000 with its brokerage firm. Then, after entering an order to “Sell to Open” this put contract, the account receives $1,882 (i.e., $18.82 x 100 put contract sold short). As a result:

  $1,882 / $60,000 = 0.03136 = 3.136% over 10 days

If an institution can repeat this trade every 10 days for one month, the expected return (ER) is 9.408%, and over one quarter, the ER is 28.22%. These are very attractive returns and show that investors are incredibly bullish.

For example, even if MU stock falls to $600 on or before May 15, the institution still has a lower breakeven buy-in point:

  $600 - $18.82 = $581.18, i.e., 10% below today's trading price

The bottom line is that investors are still incredibly bullish on MU stock. This is even though analysts' price targets are now even lower than its trading price. Maybe analysts will have to raise their price targets and reassess the company's upside potential.

Reassessing MU Stock's Valuation

I have decided to reassess my own MU valuation. For example, instead of focusing on the next 12 months (NTM) revenue as I did in my last Barchart article, I think the market is now focusing exclusively on its 2027 revenue and FCF potential.

For example, analysts now forecast $169.79 billion in 2027 revenue. Using a 28.8% FCF margin (i.e., equal to its fiscal first half FCF margin):

  $169.79 billion x 0.288 = $48.9 billion in FCF for 2027

That's $8.9 billion over my prior $40 billion NTM FCF forecast.

Next, I have decided to increase the valuation metric from a conservative 17.5 FCF multiple to 20x (i.e., a 5.0% FCF yield metric):

  $48.9 billion x 20 = $978 billion market value

That's signficantly higher than my prior $700 billion market cap target.

Moreover, compared to today's $728.14 billion market cap, according to Yahoo! Finance, this implies that MU is worth 34.3% more:

  $978b / $728.14b = 1.343

In other words, my new price target is 34.3% higher than today's price:

  $645.80 x 1.343 = $867.31 per share

This means that MU stock still has plenty of room to move higher, over 34% more, over the next year, based on reasonable fundamental valuation assumptions.

The market realizes this as well, and this is leading to huge options volume in MU stock.