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$MU reports earnings tomorrow after close, and Implied Volatility has been slowing increasing in the weekly option cycle.
As of today (6-29) there is a slight call skew in the weekly cycle of about 5 cents, along with a raw IV of around 76%, which is pricing in a current expected move of around $4.12 by this Friday.
Start with the Chart
On the Daily Chart you can see the next resistance level will be the 23.6 Fib Level, or the $85 area, which $MU has struggled with in the past, most recently the early week of June.
Above the Fib Level we are watching the $87 and $90 levels. Support-wise the 50 Day SMA is currently provided a solid base, which we are riding now, and below that we are watching the 9 Day EMA sitting right at the $81 mark.
RSI and Stochastics both entering overbought territory, but with Earnings Catalyst, relative strength will not carry as much weight as usual.
On the 30m Chart you can see we most recently broke down out of a rising wedge pattern, and are currently sitting in between the 9 Day EMA and the 50 Day SMA.
If trading off the 30m chart those two moving averages will be key in spotting a trend out of earnings, as well as keeping on eye on the breaching of the lower Bollinger Band that we made today.
Trade Idea Into Earnings
With Consensus pricing in a beat of $1.72, the actual whisper number is up at $1.78. It seems the weekly Options are optimistic as well with the Call Skew we have previously mentioned.
At Initiative we like to take advantage of this type of over-speculation, while also trying to stay as close to Delta Neutral as possible. As earnings are always 50/50, and no one knows exactly for sure which way the stock will go. (E.g. $NKE last week).
With stocks below $100 we like to look to Short Strangles, where our max loss to the down side is getting long stock, while also putting time decay (Theta) and Implied Volatility Contraction in our favor. (Also know as IV Crush, most stocks IV contract and lower immediately after earnings or news announcements).
For this trade, we will try to stay relatively safe in here, we are looking to the August 20th expiration cycle, selling the 75 Put and selling the 90 Call. We will be collecting around $3.70 for this trade, with a Delta of -6, Theta of 7.1, and a POP (probability of Profit) of around 63%.
Obviously, we will be managing this trade early, as most earnings trades we exit the following day.
How would you trade this stock?
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