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Overbought Stock of the Day: Micron (MU)

Overbought Stock of the Day: Micron (MU)

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  • Semiconductor giant Micron (MU) has seen shares surge over 20 percent since the start of the month. It’s no surprise that shares are now overbought, and a key indicator shows that a pullback is imminent.

    Shares are overbought based on a number of factors. The most obvious is the relative strength index, or RSI. It topped 70 on Friday, but Monday’s surge led to an RSI reading of 78, the highest for shares in nearly a year.

    Besides those indicators, shares gapped higher on Monday. Traders tend to fill gaps, meaning that the recent move higher may have peaked with Monday’s trade. With the share price likely to pull back at least 5-10 percent in the next few weeks, traders should look at a downside bet.

    Action to take: The January 2021 $55 puts look like the perfect trade here. On a downswing, shares are likely to drop to $55, moving these options in-the-money. Any pullback will likely take place in just a few weeks, so the January strike date looks good too. And trading for around $1.76 per contract, the options give decent downside protection for the cost.

    Traders should look for a drop to play out soon, and grab a quick profit in this trade. The likely returns should be in the mid-to-high double-digit range.

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