Micron Technology, Inc. (MU) is trending in the news after an analyst at a major investment bank in Europe downgraded the shares. This was the 4th downgrade of MU since August 6th. Prior to the early-August downgrade, our sources indicate the company received no downgrades for an entire year. Getting 4 downgrades in a row, especially this one that is a couple of weeks before the company reports earnings, is quite unusual.

One of the things we like to do here is quantify stock price reactions to analyst upgrades and downgrades. In this case, the 2-day return of MU shares after the first downgrade was a gain of 3%. After the 2nd downgrade, the stock dropped 5% in 2 days. Then it dropped 4% in 2 days after the third downgrade. That gives us some idea of how the shares perform when analysts start souring on the company.

Meanwhile, volatility expectations are high. Options traders have priced MU options as if they believe we’re about to witness a return of the 2022 bear market, which saw the stock fall from 95 to 49. Not only that, out-of-the-money put options are priced to exceed the 2-day decline experienced in all of the recent downgrades. The options are likely mispriced. This gives our favorite limited-risk, high-probability strategy an edge.

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This Volatility Cone  chart for MU compares implied volatility expectations for each term to the historical volatility for that same term. The blue line shows the average historical volatility, the purple lines show each HV measure’s highest high and the lowest low over the past year. You can see that all terms are near or even exceed the extreme high historical volatility. This chart does not show the 2-day term, but the graph on the next page will help illustrate how expensive the options expiring tomorrow are compared to how the stock behaves in the real world.

This MDM graph  compares the modeled expected distribution for future stock prices (the orange line) with the actual distribution of MU’s share prices over the past year (the blue histogram). You can see that the actual stock movement shows that the stock does not make moves as large as the current options prices are expecting. This graph tells us that the options expiring tomorrow are mispriced.

MU stock is down in pre-market trading after a 4th downgrade since August 6th. Investors are pricing the options for tomorrow’s expiration for a return to the 2022 bear market. The largest 2-day down move after a downgrade since August 6th was 5%.

This is a high-probability option selling opportunity where we can sell options with a breakeven price that is 6% out-of-the-money with a good chance at a 14% return in just 2 days.

To get the specific details and prices on today’s trade idea, be sure to read today’s ODDS Online Daily Option Trade Idea.

To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.

Thank you,

Don Fishback