Volatility levels in Micron Technology Inc. (MU) have spiked over the last week, with shares plunging by 15%. Now shares of the chipmaker are down almost 29% from their 2018 highs last seen in May. If that wasn't bad enough, investors should brace for even more significant levels of volatility in the weeks ahead. Shares could trade higher or lower by as much as 15%.
The stock took a massive hit when a Baird analyst noted that gross margins for Micron might be peaking. Meanwhile, the company's CFO stated at a conference that NAND memory chip prices declined in the third quarter. The two negative headlines where enough to send the stock lower.
Volatility levels may rise even higher following fiscal fourth-quarter results on September 20. The long straddle options strategy is pricing in a big rise or fall in the stock's price by October 19. To buy one put and one call cost approximately $6.60. That means the stock may rise or fall by 14.5% from the $45 strike price. It places the stock in a trading range of $38.40 to $51.60. The bad news is that the number of bets shares fall outnumber the bets shares rise by more than 2 to 1, with 36,000 open put contracts at the $45 strike price.
As one would expect, implied volatility levels are high as well, at almost 70%. That is almost seven times greater than the implied volatility of the S&P 500, which is 10%. Micron's implied volatility is even higher than another volatile stock in the news, Tesla Inc. (TSLA).
Micron is forecast to deliver strong results when it reports on September 20. Earnings are forecast to rise 64% to $3.31 per share, while revenue is forecast to climb by 34% to $8.2 billion. The company has beaten its earnings estimates the last eight quarters in a row.
Focusing on Gross Margins
But a big focus this quarter may come on those gross margins. The company has seen significant gross margin expansion since late 2016. It is one of the primary reasons why the stock has climbed so much over the past year. Should gross margins show signs of contraction or weakening in the future, it may present a problem for the stock's continued rise.
The upcoming results for Micron will likely be a big event for the stock price. Whichever way the stock price goes it may end up being a big move either way.