Micron Technology Puts Have High Yields for Short Sellers Even With MU Stock Higher

Micron Technology (MU) stock is up from a recent trough and in a trading range. But short-put MU yields at a strike 9% lower over the next month make over 4.50%. That's very attractive to value investors.

MU is at $961.26 in midday trading, up 31% from a $739 trough price on July 29. However, it's been treading water for the past three months, as the chart below shows. For example, on May 29, MU closed at $971.00.

Shorting MU Puts Works

This makes it ideal for short-sellers of out-of-the-money (OTM) cash-secured puts. You can make significant yields shorting these puts over one month.

For example, I pointed out in a Barchart article ("Analysts Keep Hiking Micron's Revenue and Price Forecasts - Shorting MU Puts Works Here," Aug. 14) that MU stock looked cheap.

In addition, its $900 strike put options had a one-month yield of 4.864% (i.e., $43.78/$900.00). Today, those puts that expire Sept. 11 have fallen to $28.80.

Wow! An investor would have made $14.95 over one week. That's 82% of the $18.17 climb that MU stock made over the period. However, the investor only had to risk $900, not the $949.83 where MU was on Aug. 14.

As a result, the short-put return was close to the gain from holding MU stock:  $14.95/$900.00 = 1.66% gain, vs. 1.91% in stock gains.

Moreover, if MU stays flat from here, the investor will make 4.864% over the period, rather than 1.91% from holding MU.

New Short-Put Yields are Still High

For example, look at the Sept. 25 expiry option chain. It shows that the $900.00 strike price put, which is 6.8% lower than today's price, has a midpoint premium of $48.40.

That means a cash-secured short-put play has a one-month yield of 5.211% (i.e., $46.90). 

That's better than a week ago, even though the strike price is the same; MU stock has risen, and the distance from the trading price is larger.

However, the delta ratio is relatively high at 32.07%, implying close to a one-third chance MU could drop to $900.00 by Sept. 25.

So, taking a more conservative line, the $880.00 put short-put play has a midpoint premium of $40.00. The strike is almost 9% below today's price. That gives the cash-secured short-put investor a one-month yield of 4.545% (i.e., $40/$880.00).

The bottom line is that this provides an attractive expected return (ER) to an investor, especially if it can be repeated. For example, over six months, the ER is 27.27%.

That's the same as buying MU stock today and seeing it rise to $1,223.

Downside Risks

Don't forget that an investor could still end up with an unrealized loss. For example, if MU drops below the breakeven point of $840.00 by Sept. 25 (i.e., $880-$40), then the investor's assigned purchase of 100 shares could be underwater.

But, at least the investor has alternatives. They can short covered calls or just hold on. As I pointed out in my last article, MU stock is worth over $1,900 per share, and analysts have prices targets over $1,500 per share.

The bottom line is that shorting one-month expiry MU puts is still an attractive play for value investors.