Replies to post #1803 on Micron Technology (MU)

[JLS]

IMHO

If that trade was a purchase, it will very likely expire worthless.

Therefore I think those Calls were sold, not purchased.

I'll explain:

Just to break even, MU would have to go to a hair over $42.50 by next Friday. That is not likely to happen since the average increase in price that MU has shown over the last 18 months is about $0.36 per week.

Therefore, I think that trade was a Covered-Call sale (the kind of stuff I very often do). The seller thinks MU will stay relatively flat during the next week. If it continues to go down, after the current fall he is OK with that.

In fact the seller of those calls may have just purchased the shares today near the low today, which was $40.01. By selling those Calls his gain on that $40 is already a hair over 2.5%. If his shares are assigned next week at $41.50, then he has made an additional $1.48, or 3.7%, for a total gain of 6.2%. Not bad for a week's work.

[realfast95]

those 41.50's are at 1.20
so he's up what $39000

[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

[realfast95]

The 41.50 expiring Friday 12/8 are at 1.23-1.40