Micron Technology (MU)

[JLS]

Why that was a bad trade.

Assuming it was a long-only options trade (which I think it was not).

Average cost to enter trade = $1.03

Large overhead resistance shown by the following chart (linked below) is at $44 (to be generous). At the time of entering the trade, MU was clearly in a down-trend and the trade only has one week to work. There is also an SR (Sup-Res) spike just below $40. $40, itself, could also be support as it is a nice round number. So, since the trend is down, MU is likely to test lower support before reversing upward.

Then, going back up, round numbers often become resistance, and on the day of the trade, $42 was resistance. It is likely to remain resistance until it isn't (which uses up time). Then it has to deal with $43.

So (as an options-only trade) was it a good trade to enter in the first place? Since good options trades are much less common than bad trades, option trades should not be entered that don't have high reward/risk ratios, such as a ratio of 3 or higher.

So I'll calculate that ratio if a long-only options trade:

Based on overhead resistance, the maximum price that MU could likely achieve within a week would be $43.85 (from SR chart). At time of purchase (if options only trade) MU was probably trading at about $41.50. If I assume MU goes to $43.85 by options expiration (end of this week), then maximum expected gain is $2.35. The average cost of the options was $1.03. So the reward/risk ratio would be (43.85 - 41.50)/1.03 = 2.28.

A good options trader would not have entered a trade with a reward/risk ratio of only 2.28. Good options traders want a ratio of at least 3, and 4 would be really nice but isn't easy to find.

So I'll stick with my original assumption that the option trade was a CC trade and shares could have been easily purchased on the same day at a price below the options strike of $41.50. 2,600 Calls sold at $1.03 would immediately put nearly $268,000 dollars in his account.

MU SR: http://investorshub.advfn.com/boards/read_msg.aspx?message_id=136574088