Unlocking the Power of Covered Calls with Micron Stock

Investing in the stock market can be a thrilling experience, especially when it comes to stocks that have shown remarkable growth over the years. Micron (MU) is one such stock that has seen its price surge significantly, offering investors substantial returns. In this article, we’ll explore the concept of covered calls and how it can be used to generate impressive returns without selling your shares.

Buying a good stock and holding it for years or even decades is a time-tested strategy. After all, the biggest companies today traded at significantly lower prices before, and if you were able to take the ride all the way up, then you’re probably looking at some tidy triple-digit returns. This is exactly the case for Micron (MU). If you’d bought the stock at the start of the year, you’d be up 240%. If you’d bought it three years ago, you’re looking at a return of over 1,400%.

So, what’s driving this incredible growth? Memory chip prices have been climbing all year as AI data center buildouts demand more and more supply, and Micron’s last several quarterly reports have been the best in the company’s history. On top of that, Micron has spent the past year signing over a dozen long-term supply contracts with its biggest customers, agreements that guarantee minimum purchase volumes and protect Micron’s margins even if the broader memory market cools off.

That sounds like a win, until you read the fine print. Several of those same agreements lock in pricing for existing products based on where the market sits right now. In other words, the same deals that protect Micron on the way down may also be keeping a lid on how much higher those specific product lines can go from here. If a meaningful chunk of this cycle’s pricing power is already spoken for in these contracts, some of the easiest gains in MU stock may be behind it.

However, no stock climbs forever, regardless of the reason. After a bout of profit-taking, Micron stock has fallen from its 52-week high of $1,255 to $972 today, or roughly -23%. Understandably, some investors might feel a little uneasy holding through all that volatility and want to lock in some gains. Others might be just holding on for dear life, hoping for an even higher trend.

But did you know there’s a comfortable middle ground between these two? By selling a covered call, you can hold onto your shares and get income from them while waiting for MU stock to climb to your preferred selling price.

A covered call is an option strategy that involves selling a call option on 100 shares of a stock that you already own. Your goal is for the call to expire worthless, which happens when the stock stays below your strike price at expiration. Simple, easy, elegant.

However, that comes with an explicit agreement to sell your shares if the stock trades above the strike price at expiration. That’s why it’s essential to set your strike at a price you’re comfortable selling at.

So, how does this work for Micron? Micron (MU) Stock: Is Now a Good Time to Sell Covered Calls? First, let’s assume you bought 100 shares of Micron at today’s price: $971.66 per share, or $97,166 total.

Now, you need to decide how long your covered call contract will last. Short-term covered calls on MU are usually chosen for expiry dates in the range of 30-45 days. If MU trades below the strike price and the call expires worthless, you can repeat the process.

This strategy is best when you want to earn income but remain flexible. After every contract expires, you can change the strike price or expiration date, or both. Calls that are around four to eight weeks out are also easier to close or adjust as necessary.

Let’s take a look at your options. From Micron’s main page, you can click on Covered Call under the Option Strategies menu right here:

Once there, you’ll be taken to the results page for the closest expiration date. From the drop-down here, change it to whatever date you prefer.

For this trade, I’ll change it to September 25, 41 days from the time of the screen. Now that I have trade results, I need to select my strike price. Again, this should be at a price I’m comfortable selling my Micron shares at. So let’s say I’ll select $1,310 as my strike price.

According to the screener, I can sell this 1310-strike call for $14.20 per share or $1,420 total, with a 52% probability of profit. Right now, this call option is ~35% out of the money, which is also (roughly) your potential return from the stock sale should this call be assigned.

Speaking of which, if the stock trades above $1,310 at expiration, I keep that $1,420 premium plus the profit from selling my 100 Micron shares at that price, which is about $338.34 per share, or $33,834 for 100 shares. That’s the assignment process in a nutshell.

On the other hand, if Micron stays below $1,310 at expiration, the call expires worthless, and I get to keep that $1,420 with no further obligation. Furthermore, if I can repeat this again and again for a whole year, I’ll get roughly a 13% return.

That’s almost the yearly average of the S&P 500 – all without selling my shares, though that’s always on the table when you’re selling covered calls.

Long-term covered calls on MU, on the other hand, are trades that are called LEAPS, or Long-term Equity Anticipation Securities. They’re standard contracts that expire anywhere between one and three years.

So, let’s see the difference that would make to my trade. I’ll change the expiration date in the drop-down to September 17, 2027, around 398 days away, then I’ll look at the same strike price.

According to the screener, I can sell this 1310-strike covered call for $195.10 per share or $19,510 total, with a 62% probability of profit. Even better, the annualized return is 23% assuming the stock goes nowhere – almost double that of the short-term covered call.

But if the stock moves above the strike and you’re assigned, your annualized return skyrockets to a whopping 63%. That means more income upfront, with significantly less active management.

But there’s a catch: by selling a call that’s a year out, you’re giving up much more upside and flexibility in exchange for that larger premium.

Given your choices, which trade should you go with? The 30-to-45-day covered call gives you more flexibility. If Micron moves sharply higher, you have more opportunities to adjust your strike or simply stop selling calls. You can also keep collecting premium as the stock moves.

The one-year covered call, on the other hand, is much more hands-off. You collect a large premium upfront and don’t have to repeat the trade every month. It also has a higher probability of profit. But in exchange, you’re committing to that $1,310 strike for roughly a year.

And remember, the biggest risk with either strategy is the same: your upside is capped. If Micron suddenly surges far beyond $1,310, you still have to sell your shares at that price if the call is assigned. Yes, you get the premium and the gains, but you miss out on everything else above your strike price.

Either way, the covered call gives you another option besides simply holding through the volatility or selling your shares outright.