Transcription
Uh, this week we're going to take a look at Micron. Obviously, it's had a really big move since the last time it reported results. And the key thing here is that Micron is uh positioned in a very similar way to that it was uh back in March when it uh did actually fall rather significantly following results. And what we're going to take a look at is really the option positioning going into this uh result and try to figure out, you know, what it all kind of means.
And I think uh the first thing that really stands out when we look at what Micron is set up as, we can see that the call wall is up at around 1,200 and the put wall is down at 900. And so the call wall represents the area with the most amount of call gamma built up and the put wall represents the area with the most amount of put gamma built up. And I think what stands out with this chart is that the price of the stock is at 1135, let's call it. And the call wall is relatively speaking much closer than the put wall is relative to where the stock is trading. And if you also notice, there's a big level. There's two big levels of call gamma built up at 1,050 and 1,100, which offers a little bit of a support area should the stock begin to fall.
The options expiring on uh June 26th are actually trading with implied volatilities up around 132%. And that's expected to decline the week of July 2nd to around 120%. And uh when we kind of think about what this means and why this is important is because if we look at where the the 10-day uh implied volatility is, you can see that 10-day implied volatility is at a 2-year high at around 120%. Also, it's important to note that we saw, you know, typically once you get past uh once you get past earnings, you typically see implied volatility fall sharply. So this was the March options ex, this was the March earnings date where we saw implied volatility up where around 100% and ended up closing down at around 65% in just a couple of days. And you see the same thing happened at the end of December. Same thing happened at the in the middle of September. This was the uh June uh print last year where they reported results. So you see the pattern consistent.
And what this would explain to me or would suggest is that we're likely to see implied volatility rise for Micron continuing into earnings and then once the earnings print happens, we expect the uh implied volatility to fall really sharply. And so the reason why this matters again is if we go back and look at our option positioning, the delta values are all sort of inflated uh in theory, right? Because implied volatility is elevated, making puts and calls, the premiums on them more expensive. And once implied volatility falls, the premiums on the puts and calls decline. And we can clearly see from looking at this delta chart, delta positioning is extremely call, call, extremely skewed to calls, meaning that uh there's not really very much put delta out there. And so market makers, when they hedge their positioning, they're usually taking the opposite side. So assuming that most of these calls have been bought by customers, market makers are to be long deltas to hedge that position. And essentially, once the premiums decline uh due to IV, IV melting, you then see the delta positioning probably come down as well. Market makers are then going to be thus overhedged and likely uh potentially could begin to sell some of their uh hedges and unwind those positions.
What I've done is created an IV crush simulator, I call it. And, you know, assuming that volatility falls by, let's say, 30%, or let's say it falls by 35% like it did the last time in March, basically you're going to have stock to the market makers are going to have stock to sell. And we need to think about it from a really from a a standpoint of where is the positioning going into this. And with the call wall at 1,200, what does that mean? So, right now with a $1,100 call that's expiring on the 26th, that option is trading for, let's say, $90. Okay, that means that uh the stock is, this option is implying that the shares are going to be up at around $1,190 by the time you get to the 26th. Uh, the issue obviously is that number one, once we have earnings come out, the implied volatility is going to fall. Let's say it falls by about 35% and the implied volatility goes somewhere around 85%. The value of the call now is only worth $66. Uh, and so that means that now you're losing on the calls that you have previously bought going into earnings at 11 for the $1,100 strike price.
The other issue is that the call wall being at 1,200 limits your potential upside because number one, you're in a positive gamma regime, which means market makers may very well be sellers of Micron at 1,200, pinning the stock at that price. Uh, which is not unusual to see happening around the call wall. Around a major market event, you tend to get pinned at that gamma level, which means that your upside is at most on on the $1,100 strike price uh about $10. Uh, meaning that the options would be worth a thousand, would be worth $100. Uh, but on the other side of the equation, if you know the stock isn't able to get um up to 1,200 or more importantly, hold that level, these options are likely going to be underwater. Additionally, the $1,200 calls are really at risk because if this, you're paying $47 for them and even if the stock gets up to $1,200, you're going to be losing money because these options, once implied volatility falls, is only worth $23. So these $1,200 calls actually need the stock to trade around $1,250. Uh, and so it gets, it becomes harder and harder the higher and higher these call values go in order for an owner of the calls to make money. Which therefore means that once the company reports and the implied volatility decays, these premiums are going to fall. You could potentially get pegged at a $1,200 strike price if the stock actually moves up. And anyone that owns calls that have a break-even price when you add the strike price plus the premium paid of 1,200 or more are going to be underwater and they're going to likely start liquidating and selling those call positions along with the fact that market makers may find themselves overhedged and along with the fact that the stock could very well get be capped by the call wall at 1,200, which really kind of tells you that the real risk in Micron after reporting results is that the stock could actually trade sharply lower.
And and the real issue here, I think, is that the put wall's all the way down at 900. And so if the put wall is all the way down at 900, it means that once the stock uh once the company reports and all this gamma and delta positioning starts losing value potentially as implied volatility comes out of it, the shares could really start slipping. And the two areas on the chart that really make the most sense to me in terms of where they're likely to find support would probably be at the uh flip area where the zero gamma region somewhere in this 1,000 area. You can see right here we kind of settle out and you can see the flip zone kind of takes place at around 1,000 and then again at the put wall around 900, which is significantly lower than where the stock is trading right now. And so the way you kind of set this up in my mind is that the upside is fairly limited, but the downside risk is a lot greater than what you could potentially gain on the upside. Even if they report blowout numbers like they did in March, uh, you know, and the stock still ended up declining from peak to trough by about 32%. Um, it's quite possible that you could be in a very similar type of position as you were then because the stock reported great results and everyone was confused as to why it moved down. Now, eventually it did move up and it did probably reflect some of those really strong results, but that's, but the unwinding of the option positioning, I think, at first really kind of did it in.
And when you even look at the chart from a technical perspective, you can begin to get a sense of what, you know, of what's really happening here. Again, you can see where some of these levels exist. In fact, if you look at the chart, you can see how, you know, the $820 area, there's a giant gap that was created in there. Um, you can also see how this region right in here around $895 has been acting as support, which coincides with the put wall. Uh, this is another area of uh resistance around 1085, which also kind of corresponds with 1,100 being uh a major call area and then of course 1,200 would be the next major area of resistance on the stock, which uh obviously from a uh call wall perspective again, uh if you look at the upper Bollinger band, that's currently around 1160. So, what it's kind of showing you, I think in my mind, is that there's lots of levels technically that also kind of point out the same sort of support and resistance levels that the option market is pointing out. And I don't think that's by chance, right? I think a lot of what you see in the market today, especially technicals, is just really a reflection of the option market pricing.
And so, you know, it wouldn't be all that surprising, given how much the stock has moved, given how overly skewed it is to call positioning, uh that once the company reports and implied volatility comes down, which is a very normal mechanical function after results, that you could really see the stock fall back towards, you know, the 900 level, which really wouldn't even be uh as big of a decline as what you saw following the um the March report. Obviously, that took place over a couple of days. And it's quite possible that you could see it go uh back to 900 or so. And even quite possible, once you start looking at it, you know, below 900, the next major level comes around 730. So again, if you kind of lose this level, you're looking at something much steeper, but that's obviously much lower and there's a lot of different steps that are going to take it to get there. So I think, you know, again, you're looking at a position where upside seems fairly limited relative to the risk you're taking. And right now, and that's mostly because implied volatility is really elevated because option pricing is very high. And once we get past results, we know that that's going to likely unwind uh and potentially result in the shares giving back some of the uh some of the recent gains.
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