While frontline semiconductor companies like Nvidia Corp NVDA have garnered most of the spotlight when it comes to artificial intelligence, infrastructure players like Micron Technology Inc MU deserve attention. Primarily, Micron specializes in high bandwidth memory (HBM) chips, which undergird AI-related functionalities. This arena has enjoyed significant growth, helping MU stock jump to over 38% on a year-to-date basis.
However, enthusiasm in the market never follows a perfectly linear trajectory indefinitely. Case in point was what happened to MU stock and other semiconductor assets earlier this month. After another strong run, investors decided to take some profits off the table. Fundamentally, this protective action made sense as geopolitical tensions between the U.S. and China — especially as related to tariffs — dominated headlines.
Conspicuously, between Aug. 12 and Monday’s close, MU stock dropped nearly 9%. However, rather than the red ink being a warning sign, it could be an opportunity for contrarian investors to grab a possible discount.
From a financial perspective, the bullish argument enjoys tremendous credibility due to recent earnings performances. For example, during the company’s fiscal third quarter, the semiconductor giant delivered earnings per share of $1.91, well above Wall Street analysts’ consensus view of $1.60. This figure also blew past the year-ago quarter’s result of 62 cents.
On the top line, Micron generated $9.3 billion, again beating the Street’s estimate, which in this case stood at $8.87 billion. Further, the company trounced the print from one year ago, which landed at $6.81 billion.
Of course, investors will be looking for sustained performance when Micron next releases quarterly results, scheduled for Sept. 24. But with so many strong reports, there’s arguably no apparent indication that the company will disappoint. Therefore, outside of exceptional circumstances or evidence, the bullish outlook will likely carry more weight with traders.
MU Stock Is Now Flashing A Rare Quantitative Signal
While the headlines provide important color and context, narratives alone aren’t always effective for short-term speculators, particularly options traders. Basically, by the time you’re reading about an opportunity at a major news publication, the opportunity has long since passed. Instead, traders must look at market demand signals to formulate an appropriate game plan.
Typically, options traders rely on volatility-dependent analytics. Derived from the Black-Scholes-Merton formula, this approach involves baking in (or taking away, depending on the circumstances) volatility relative to the target security’s baseline. For example, if there are exogenous factors such as earnings reports on the horizon, implied volatility for the affected options chain will rise.
In this manner, traders can calculate an upside and downside price target range, which is roughly equivalent to one standard deviation above and below the current market price. However, this approach — while useful in understanding what the rest of the market may be thinking — lacks specificity. Put another way, it doesn’t tell you which outcome (the bullish scenario or the bearish scenario) is likely.
To get a better understanding of what could really happen, it’s arguably better to consider the far-less utilized pathway-dependent analytics. Here, price action is broken down into discrete behavioral states rather than continuous scalar signals. Next, probabilistic forecasts are developed based on past analogs of like-to-like conditions. This approach respects the actual observed pricing geometry of the target stock. So long as there is enough data, it’s a more practical and utilitarian framework.
Regarding Micron specifically, MU stock has printed a 3-7-D sequence: three up weeks, seven down weeks, with a negative trajectory across the period. Historically, this quantitative signal has acted more often than not as a reversal beacon. In fact, in 60% of cases, the following week after the signal flashes sees upside, with a median return of 3.01%.
This performance is notable because the baseline probability (for upside) is only 50.57%. Thus, an incentive exists to consider a bullish strategy when the 3-7-D sequence materializes.
If the bulls maintain control of the market throughout the next 10 weeks, MU stock could potentially hit $133.07, as estimated by past analogs. However, the wildcard is if the bears take control. At that point, MU could see a slow roll down to $116.31.
Still, with enthusiasm still red-hot for AI, combined with Micron’s robust financial performances, the upside pathway is likely to be more credible.
Two Enticing Trades Stand Out Among The Crowd
Using the market intelligence above, there are two multi-leg options strategies called bull call spreads that stand out. The geometry involves buying a call option and simultaneously selling a higher-strike-price call, with the premium from this short call partially offsetting the debit paid for the long call. This transaction results in a discounted bullish position, along with a capped downside exposure.
On the other hand, the upside potential is also capped due to the sale of the short call. However, if a trader isn’t anticipating a gargantuan move, buying a spread could be more effective than purchasing a naked call (due to the premium, which can be hefty for in-the-money calls).
First, the 120/122 bull call spread expiring Sept. 19 appears enticing. This trade requires a net debit of $90. If MU stock rises through the short strike price ($122) at expiration, the maximum profit is $110, a payout of over 122%.
Second, the 120/125 bull spread expiring Oct. 17 could really have speculators thinking. Yes, the net debit required is much more at $205. However, if MU stock rises through the $125 short strike price at expiration, the maximum profit is $295, a payout of nearly 144%.
The reason for the generous payouts (especially for the October spread) is that the projected risk-reward window is quite wide. At the Oct. 17 options chain, the potential upside could be around $130 while the downside risk is targeting around $117. Still, given the blistering demand for AI-related enterprises, the upside pathway could be more probable, which is why the bull call spread is so tempting.
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