Options Corner: Micron Traders Are Dealt A Statistical Hand Worth Playing

Last week, semiconductor giant Micron Technology Inc MU released its financial results for the third quarter of fiscal 2025, to bullish investors' delight. Revenue landed at $9.3 billion, easily beating the consensus estimate of $8.87 billion. Further, the company smoked Wall Street's estimate for earnings per share of $1.60 by delivering an adjusted print of $1.91. Of course, the "problem" here for MU stock is that the good news is now baked in.

However, Tuesday's price action likely had speculators thinking. In the afternoon session, MU stock found itself down about 2%. That's not a particularly enticing discount if you're playing the long game. However, if you're exclusively focused on the short game — specifically through options trading — a 2% move can be an enticing event. That's because options essentially represent a market for the market, where lower-cost premiums provide enhanced leverage.

Naturally, there's a risk in bidding up a security that has already had a strong run on well-known catalysts. Still, there's fundamental evidence that the latest dip in MU stock could be temporary. First, according to the National Institute of Standards and Technology, Micron is the only U.S.-based manufacturer of advanced memory chips. This fact makes the semiconductor specialist strategically important, aligning with President Donald Trump's efforts to promote U.S. leadership in tech.

Most importantly, Micron is straight-up critical for the deployment of artificial intelligence. As a specialist in manufacturing memory and storage chips — specifically DRAM and NAND flash — the company plays a vital role in AI infrastructure. Given that machine intelligence and its subsets are forecasted to see stratospheric growth, Micron operates on very fertile ground.

Subsequently, while there's a risk that MU stock could fall back on prior support levels at $100, there's also a fundamental case that the latest splashing of red ink could be ephemeral.

Using Blackjack To Solidify A Bullish Strategy For MU Stock

Now, as much as one may sift through the fundamentals or draw endless scribbles on the technical chart, the harsh reality is that both approaches lack specificity. Options traders require a thesis to cover not only the magnitude component (x-axis) of an asset but also the time element (y-axis). Being right on one and missing on the other leads to a busted transaction.

To improve the odds of success, we can take a page out of the blackjack playbook, specifically the concept of card counting. Professional blackjack players will keep a running count (in their heads of course) of the ratio between high cards and low cards that have already been played. The idea is to bet large when the odds favor the better and bet minimally when the odds favor the dealer.

However, in order to establish the advantage and the magnitude of said advantage, the blackjack player must calculate two types of probabilities: derivative and conditional. Derivative probabilities establish the baseline odds for the player, otherwise known as the Gaussian framework. But when given a particular hand, the player applies conditional probabilities, or a Markovian framework, to understand whether that hand provides an advantage over baseline.

Still, this is where I would estimate that 99.99% of financial experts get tripped up: conditional probabilities cannot be calculated using continuous scalar signals. There's a reason why card counters separate individual cards into only three categories: negative value, neutral value, positive value.

Only by converting scalar signals into discrete events can we transition from Gaussian principles to the all-important Markovian principles. That's the core reason why I no longer look at price but at market breadth or sequences of accumulative and distributive sessions.

At the moment, the trailing two months of price action for MU stock can be converted as a "7-3-U" sequence: seven up weeks, three down weeks, with a positive trajectory across the 10-week period. Similar to a blackjack player, I don't care what the individual card number or price is; I just need to know whether the market made a decision to buy or to sell.

By converting MU's price discovery process into (predominantly) binary sequences, we can identify that since January 2019, the stock flashed the 7-3-U sequence 27 times. In 62.96% of cases, the following week's price action results in upside, with a median return of 2.19%.

Based on past analogs, if the bulls maintain control of the market for the next three weeks, MU stock could potentially push toward the $125 level.

Taking What The Dealer Will Give

Based on the hand that we've been dealt, I'm intrigued by the 122/124 bull call spread expiring July 25. This transaction involves buying the $122 call and simultaneously selling the $124 call, for a net debit paid of $95, the most that can be lost in the trade. Should MU stock rise through the short strike price at expiration, the maximum reward is $105, a payout of roughly 111%.

With the above trade, you have about four weeks for the bullish thesis to pan out, giving you a cushion to account for the chaos inherent in open systems. Just as importantly, the Markovian edge gives you a statistical advantage over the Gaussian distribution. As a baseline, the chance that MU stock will rise on any given week is only 51.18%.

To be clear, we're still dealing with probabilities, not certainties. Further, the stock market's open system means that random, unpredictable events can always disrupt the paradigm from expected norms. No model can fully account for this chaos. However, most options calculators are based purely off Gaussian principles, making them aesthetically beautiful but functionally worthless. By converting to Markovian frameworks, we give ourselves a fighting chance.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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