Options Corner: Microchip Offers A High-Risk Wager Just Ahead Of Earnings

On paper, Microchip Technology Inc. MCHP should rank among the top semiconductor specialists.

While it's not directly tied to artificial intelligence, the Chandler, Arizona-based company plays a powerful supporting role in AI applications. Fundamentally, the company specializes in microcontrollers, analog chips and field-programmable gate arrays (FPGAs) that are essential for embedded AI systems. Encompassing relevancies include industrial automation, automotive AI and the Internet of Things (IoT).

Despite the broader importance, Microchip has struggled where it matters most for investors — in the charts. Over the past 52 weeks, Microchip’s stock has declined by more than 38%. Unfortunately, several challenges have impacted confidence in the business.

For example, last year, management announced restructuring plans, which included the closing of its Tempe, Arizona wafer fabrication facility. It also slashed revenue guidance for the December 2024 quarter.

However, big data juggernaut Palantir Technologies Inc PLTR demonstrated that ominous clouds don't necessarily spell disaster. When China's DeepSeek R1 sparked a seismic shift on Wall Street, several AI-related names cooled off. However, Palantir's blistering fourth-quarter earnings report righted the ship. Arguably, it's not so much the individual metrics that matter but rather the confirmation that the AI story is far from over.

If so, demand for AI applications should continue marching higher, potentially placing Microchip back in the driver's seat. This backdrop sets up an exciting (albeit extremely risky) trade just ahead of the company's earnings report, scheduled for Feb. 6 after the bell.

Statistical Trends Offer an Enticing Signal

To be blunt, from a visual standpoint, it's difficult to have any confidence that Microchip’s stock will rise. Over the past six months, the equity has been mired in a downward trend channel, losing over 28% in the process. Nevertheless, statistical trends may favor a speculative bullish posture.

To be 100% clear, Microchip’s stock is a high-risk, high-reward idea: there's no other way to describe it. When viewing pricing data over the past five years stochastically (as in, devoid of any context aside from the temporal), MCHP demonstrates a neutral to slightly negative bias.

For example, a position entered at the beginning of the week has a 50% chance of rising by the end of it. Over a four-week span, the long odds dip ever so slightly to 49.81%. At the end of the four weeks, positive outcomes feature a median return of 7.52% while negative outcomes carry a median loss of 5.73%.

However, human emotions dictate the market and certain events may spark more aggressive responses. For example, last week, Microchip stock declined by 6.06%, which is more than twice the median loss of 2.95% for negative-performing weeks. As it turns out, based on past five-year trends, there's an 84% chance that whenever MCHP declines between 5% and 10% during a one-week period, the subsequent week will land in the black.

It’s best to take these long odds with a grain of salt since it could be a happy anomaly. However, these dynamically calculated odds show that over the next four weeks following the aforementioned extreme-fear event, investors demonstrate a tendency to buy the dip.

Specifically, long odds from the subsequent second week through the fourth-week clock in at over 63%.

Rolling the Dice Ahead of Earnings

On the eve of Microchip's earnings report, its implied volatility is sky-high. Stated differently, the market expects significant movement, which is not surprising. Ordinarily, a long iron condor might be prudent. However, because the market makers anticipate a big move, the available condors aren't very attractive.

It's like running a play out of the shotgun formation: the defense knows what's coming next.

Instead, the most aggressive speculators may consider bull call spreads that expire this Friday. It's difficult to identify just one trade as the selection varies depending on individual risk tolerance. That said, the 52/54 bull spread — which involves buying the $52 call and simultaneously selling the $54 call — is tempting.

For a cash outlay of $105, the trader could generate a maximum reward of $95 or a payout of 90.48%. Plus, the breakeven threshold at time of writing comes in at only $53.05. That's a very realistic upside target relative to the current market price.

Looking further out, speculators may want to consider the 52.50/56.50 bull spread for the options chain expiring Feb. 21. Statistical trends suggest that Microchip's volatility curve trends upward in the third subsequent week following an extreme-fear event. This dynamic may put the aforementioned spread in play as a risky but realistic proposition.

Now Read: