I received a great question this afternoon that I thought I would share with all my subscribers. The reader’s question was regarding the buyer of 30,000 October 40 Calls, and my writing that the trader needs the stock to rally $5.50 in the next 24 days to break even on the trade. Here was the question:
The answer is that we will never know the traders plan regarding holding this position, or selling for a quick profit. However, the reader’s question brings up an interesting options education component of this trade.
Option volatility/price is going to drop extremely hard after earnings. And because of this, even if MU were to rally $1 or $2, these calls may not gain much value, and could actually lose value. Why do I say this?
Even if the stock rallies a bit on earnings, the known catalyst would have passed, so there is likely very little which would cause the stock to rally another $3 or $4 in the next couple weeks to push it over 40. It’s not impossible for MU to rally above 40 after earnings, but if the catalyst has passed, the odds of the stock making that big move, will have dropped.
With that in mind, as the odds of the calls finishing in-the-money has fallen, it’s possible, if the stock rises $1 or $2 tomorrow, that these October 40 calls will be worth less than they are worth today. And because of that, I’m guessing that this trader is playing a big move higher, not just a small, short-term rally.
I will follow up tomorrow afternoon on this options education note, looking at the price of these options once earnings has passed.
Options Education: Micron Earnings Follow-up
As I noted yesterday, we were going to watch how the Micron (MU) October 40 Calls performed following earnings. To recap, a couple days before earnings, a trader had bought 30,000 October 40 Calls for $0.50.
In my options education article yesterday, I noted that even if the stock went up a dollar or two, that there was a decent chance that this traders calls would lose value after earnings, as volatility would drop dramatically.
This morning, with the stock higher by $2.70, and at a new 52 week high of $37, these calls are down $0.10, and are now worth $0.40. This is the perfect example of how options prices fall following earnings.
However, I do want to note, that call buyers are aggressively buying more of these October 40 calls this morning, and many other calls, looking for further upside. Here are these trades made before 11 am eastern:
Buyer of 20,000 October 40 Calls for $0.40 – Stock at 37 (trader may own approximately 100,000 of these calls)
Buyer of 10,000 September 37 Calls (exp. 9/29) for $0.25 – Stock at 36 (bought right on the open - trade expires this Friday)
Buyer of 7,000 October 37.5 Calls (exp. 10/6) for $0.50 – Stock at 36.5
Because of this continued call buying that’s targeting a move higher in the next several weeks, I will continue to hold our position. However, I will keep an eye on the overall market, the tech leaders, and if MU order flow flips bearish, for cues on when to sell.