Micron stock has returned 28.1% over the past year. This shows that the company is matching the US semiconductor industry gain of 28.3% at the same time. However, Micron (MU) has faced many risks over the past year, which have affected the stock price over and over again. These risks include weak DRAM pricing, falling margins, and US-China trade relations.
However, options traders are betting that Micron stock could continue to climb despite these challenges. So, let’s take a closer look at the company’s valuation and options activity to see if MU is a solid choice for investors at the current levels.
Why valuation is appealing for Micron stock
Micron stock is trading at 18.37x its fiscal 2019 earnings estimates of $2.56. Having said that, Micron looks undervalued compared to the sector’s median forward PE ratio of 22.97x. If the company starts to trade closer to the sector’s median levels, the stock price could be around $58.80—a gain of 22% from the current levels. Micron has a future cash flow of $272 compared to the $48.00 MU price at the time of writing.
Finally, Micron has a solid margin profile with 42.72% gross, 31.93% operating, 54.75% EBITDA, 26.97% net, and 5.76% free cash flow margins. Some of these figures substantially outperform the industry’s median. The industry consists of 47.38% gross, 5.68% operating, 10.51% EBITDA, 2.46% net, and 6.58% free cash flow margins.
How much volatility are options traders expecting for Micron stock in the coming weeks?
Looking at the November 15 options, I see a bid/ask for the $48.00 call option of $1.63/$1.64. Also, I see a bid/ask for the $48.00 put option of $1.53/$1.54. Keep in mind that the options strike is closest to the MU price of $48.00 at the time of writing this article. We can calculate the expected price move using the mid-prices of these options:
1.535 (48.00 put) + 1.635 (48.00 call) = 3.17/48.00 = 6.6%
As seen above, the options imply that Micron stock could rise or fall by about 7% by the November expirations from the $48.00 strike price. To calculate this, we used the long straddle strategy.
This assessment would place the stock in a trading range of $44.60–$51.36 by the expiration date. Moreover, the calls at the $48.00 strike price outweigh the put options about 2:1 with 9,407 open calls to 4,439 open puts.
Additionally, the calls at the $50.00 strike price outweigh the put options about 3:1 with 10,311 open calls to just 3,109 open puts. A buyer of the $50.00 strike price calls would need the stock to rise to around $50.82 by the expiration date in November.
Bullish options bets on MU
The options, which expire on November 8, saw increased call buying during today’s trading session. According to Barchart.com, the open interest for the $47.50 calls increased by 2,545 contracts to a total of 2,797 open contracts. It’s a large wager considering the total dollar value of these bets of about $500,000. A buyer of those calls would need the stock to rise to $49.15 by the expiration date. That’s a gain of about 2% from Micron stock’s current price
Also, the open interest levels for November 22, $50.00 calls increased significantly early this session. According to Barchart.com, the open contracts rose by 2,437 contracts to about 2,623. So, Micron stock is a large, bullish bet as the open interest represents a total dollar value of about $300,000. A buyer of the calls would need the stock rise to $51.07 by the expiration date. This represents a gain of about 6.4% from MU stock’s current price.
Curious about other stocks that options traders are actively betting on right now? See Nvidia Stock Could Be Poised for a Breakout, Selling AMD Stock? The Rally Could Go On, Why Microsoft Stock Could Rise after Earnings, and Alibaba Options Traders Betting on a Bullish Jump.