Shares of Micron Technology (NASDAQ: MU) have been under pressure during the past few weeks, which puts the stock in an excellent position for us to set up an income trade using our put selling strategy.

For the past 18 months, MU climbed steadily — in line with its peers. Since the beginning of 2013, the PHLX Semiconductor Index (SOX) gained more than 55%.


 

The group’s advance has been fueled by a steady improvement in the technology against a backdrop of an economic recovery and growth for the global economy. In particular, the creation of new DDR4 memory modules has caused a stir as these drives are reportedly twice as fast as their DDR3 predecessors and use 30% less power. This breakthrough is part of what analysts are looking at to help fuel future growth for Micron.

#-ad_banner-#​Unfortunately for shareholders (but fortunately for us), MU sold off in July. The pullback was largely due to competitive issues with Samsung, which made a surprise announcement that one of its new manufacturing lines would be used to produce DRAM chips, raising supply concerns.

Of course, when greater supply hits the market, prices are expected to decline. Analysts worried that Micron could struggle with less pricing power, thus experiencing tighter profit margins. However, Micron’s commitment to the DDR4 technology should allow the company to rely less on the DRAM market and potentially expand profit margins by being one of the few offering this advanced technology.

After pulling back from a high of $34.85 to a recent low of $29.38, MU appears to have found support and may be ready to rally. Considering the fact that the company has maintained a long-term bullish trend, momentum investors are likely to give MU the benefit of the doubt for now and buy the dip.

This presents us with a nice income opportunity to sell out-of-the-money put options. Even if the stock closes below our strike price, we will be left holding shares of a leading semiconductor company as it rolls out an exciting new technology.

Today, I want to sell the MU Sep 30 Puts for a limit price of $1.10. By selling these puts, we agree to buy 100 shares of MU per contract at the $30 strike price provided the stock is trading below this level when the puts expire on Sept. 19.

Since MU is currently priced near $30.70 and the supply concerns are already known, it seems unlikely the stock will fall much further. So the probability of us being required to buy MU is relatively low.

Since we are receiving $1.10 per share ($110 per contract) for selling these puts, our net cost will be lowered to $28.90 per share ($2,890 per contract). This is the amount of our own capital (along with the $1.10 in option premium) that we will need to set aside in case shares are assigned.

When calculating the rate of return on this trade, we divide the $110 in income by the $2,890 in capital we set aside for a 3.8% gain in 38 days. This nets out to 37% a year, which is very attractive as far as income trades are concerned. And given the fact that the market has already priced in the DRAM supply concerns, it appears the risk for this trade is relatively low.

With a low level of risk, a strong long-term outlook for this company and the technology it is producing, and the global demand for memory in conjunction with sales of smartphones, tablets and computers, this trade gives us two strong potential outcomes. Either we will be able to generate a 37% per-year rate of return, or we will be able to pick up shares of a strong memory producer at a significant discount to the current price.

Note: My colleague Amber Hestla has closed 52 straight winning trades using this strategy. You can see her entire track record and learn exactly how you can make the same winning trades yourself by following this link.