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New Trade – Micron Technology Inc (MU) covered call

The Micron Technology Inc covered call order executed this morning. This is another trade utilizing a total return strategy. That means that I want the stock to be called away at expiration or even better be assigned prematurely. If assigned, either early or at expiration, I will realize a nice gain. If not assigned, i can keep the stock and continue selling covered calls as long as the stock gets called away.

I use total return strategy on stocks I do not intent to hold as a core investment in my portfolio. When I was thinking about using covered call strategy against the existing dividend paying stocks I immediately knew that I was afraid to lose my holdings being forced sell them if the stock ends above the strike price at expiration.

Do you want to lose your holdings which pay you a nice dividend? You are building up your ever-increasing money machine, cultivate your holdings, keep up your allocation and enjoy increasing payout anytime you add more shares to your holdings. And all of a sudden you get called away because you sold a covered call contract against the holdings in your portfolio. I didn’t like this potential outcome.

It is recommended using put selling against stocks you do not mind owning at expiration and somewhat discounted price (unless the stock falls away too deep). So why should I use calls to be called away if I do not want such result? The same recommendation goes for covered calls that you should use it on stocks you want to sell.

And that makes for investors two trade styles available: a partial return and a total return trade. A partial return trade is about avoiding your stock being called away. Sometimes to do so, you need to apply all sorts of trade repair strategies such as rolling the strike price out, away and so on.

To have a peace of mind I use buy-write strategy selecting stocks I am OK to own for a short period. But more importantly, I buy stocks just for the purpose of being called away. That’s how I generate an extra income.

STOCK DETAIL

One of the stocks I reviewed last night and I liked the outcome was Micron Technology Inc. Micron Technology, Inc., is a global manufacturer and marketer of semiconductor devices, principally NAND Flash, DRAM and NOR Flash memory, as well as other memory technologies, packaging solutions and semiconductor systems for use in computing, consumer, networking, automotive, industrial, embedded and mobile products. In addition, the Company manufactures semiconductor components for CMOS images sensors and other semiconductor products. The Company operates in four segments: NAND Solutions Group (NSG), DRAM Solutions Group (DSG), Wireless Solutions Group (WSG) and Embedded Solutions Group (ESG). The Company’s product include NAND Flash Memory, Dynamic Random Access Memory (DRAM) and NOR Flash Memory. The Company’s manufacturing facilities are located in the United States, China, Israel, Italy, Malaysia, Puerto Rico and Singapore.

From the technical analysis perspective the stock is approaching 3-year high and most likely reach the 10 dollar level and possibly breaks thru. It already broke thru $9 resistance and I would expect the stock staying above this level.

The company acquired Numonyx and Elpida which provides Micron with better diversification and access to phase change memory market, which can be a significant technology in the future.

The stock is however considered a cyclical stock and may experience cyclical volatility. This is why I decided to take longer dated trade to give the stock time to grow.

Most of the analysts are bullish on the stock.

TRADE DETAIL

03/20/2013 10:07:54 Bought 100 MU @ 9.21
03/20/2013 10:07:54 Sold 1 MU Jul 20 2013 10.0 Call @ 0.63

 

Own 100 shares MU: $9.21
Strike: $10.00
Sold 1 Covered Call: $0.63
Total Purchase: $63.00
Commissions: $8.78
Total purchase: $866.78
Expected Option Assignment: $1000.00
Option Assignment Fee: $19.00
Expected Proceeds: $981.00
Expected Net Gain: $114.22
Expected ROI: 13.18%

How do you trade covered calls? Do you trade them at all? If you trade covered calls, do you trade them against stocks you already own or do you trade buy-write, total return trades?

 





5 responses to “New Trade – Micron Technology Inc (MU) covered call”

  1. Martin says:

    Kirkomi, I appreciate your comment and do not feel offended by it at all. I looked at the items you are mentioned and still liked to take the trade and take the risk.

    The reason why I was taking this trade as well as some other on lower priced stocks is that currently my account size prevents me selling puts on high priced stocks such as MCD, which I am for it by all means. Doing it now however I will be exposed to a very large leverage, which I do not like although I have to undergo a risk which you already mentioned, but that risk is currently smaller to me than if I expose myself to puts on higher priced stocks.

    When reviewing trades like this one I also take into account the historical price action of the last 5 years. Although everything can happen I do not expect any dramatic fall in this stock all the way down to $3 a share. If the stock falls suddenly to let’s say $6 a share it may be difficult to repair it at once. If the fall will be gradual, it is not that of a big concern to me, because I have a plan what to do to repair the trade and get out with a small profit or break even.

    As far as the statement from my “strategy”, I think it still is valid. I no longer trade stocks but invest into them for a long haul. As far as options, I admit that that statement may be slightly limping :)

    So generally I agree with you and your points, but those still do not make me uncomfortable with this trade.

    Thanks a lot for stopping by.

  2. Kirkomi says:

    I see that I will not be able to convince you. But let me try once more.

    There is an inherent difference between the level of risk you take while selling put options for McDonald’s (MCD) and selling covered call options for Micron (MU). The following comment is not meant to offend you. If you have to take an opposite position than you – i will have to say a few disagreeable things. Take it in good faith.

    Out of the last 10 years Micron has been profitable in only 5. If we add up the net incomes for the last 10 years (2003 to 2012) – it comes to -$3.3 billion. Why ? Because Micron is a commodity business. They sell chips which are replaceable i.e., there is no different between a chip from Micron or Samsung or Sandisk. The “moat” is small.

    Now, if we look at the sales of Micron and the current price we see that the P/S is 1.3. Which means that to get a P/E of 10 the company needs to have net margin of 13%. In other words, for every $100 of sales, Micron has to make $13 in profit. For a commodity business like this – a very difficult feat. Out of the last 10 years Micron has managed to achieve >13% net margin once ! On a valuation perspective – hence – Micron has more downside than upside at $9.

    And for what ? You are getting $63 on selling the call option – for an investment of $866.78. Nassim Taleb calls this behavior – picking cents in front of a bulldozer.

    You might have a lot of chance to “repair” the trade or “fix” it later – but why not avoid the whole thing. In your strategy page you say that you are

    “I knew it was dividend investing and that there was no quick rich method in trading. Thus I went back to the roots of investing and decided to stay with the most comfortable method = dividend growth investing.”

    Why not write put options on Dividend Growth Stocks. For example McD. Or better on a stock which is being punished for short term thinking like CH Robinson (CHRW).

    If Micron had a great history of being a profitable business and was selling for low valuation – the risk would have been much smaller. But doing so for a business which has been on balance un-profitable at multi-year highs – is not something a long term investor should do.

    Of course, you might want to be a trader. In which case you are perfectly right in doing what you are doing. In fact, you might even make a profit. Good luck in both cases !

  3. Martin says:

    Kirkomi, that’s the risk I am willing to take. If that happens I will have to deal with it and continue selling calls as long as possible, close the trade and take the loss. But that’s the part of the game. Not all trades will be winners and I am perfectly fine with it. Thanks for stopping by.

  4. kirkomi says:

    You are playing a dangerous game here. You are keeping all the downside and giving away the upside. Micron is a very volatile stock and it may drop from here. You might end up holding 100 stocks at a smaller buy price, adjusted for the sold call.

    • Martin says:

      Kirkomi, I just want to add, that the same about “dangerous game” you can say about any trade in the stock market. Whether you are selling calls, puts, buying calls, puts, buying or selling stocks, there always will be risk involved and there always will be the positive and negative side of the trade. But if you have a plan what to do if the trade goes against you, you can eliminate risk significantly. As far as Micron, I was reviewing this stock carefully and decided to take this trade, because I was willing to hold the stock for a while. The same as you can say when selling puts whether you are willing to buy the stock. Since I am willing to hold the stock for some time (until it gets called away) I will have a plethora of options how to repair the trade if it goes against me. So this was engineered risk taken and considered carefully.

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