Most Micron call buyers are right today and still losing money.
Micron is up 17% on the session and the calls are green. But the bid-offer spread on those options is a full dollar wide at an implied volatility of 117%, which is the market saying it has no idea where Micron settles.
That combination is draining the gains in real time.
Being right is not the same as making money.
Retail piled into calls this morning and feels like geniuses, right up until they try to close out.
The bid-offer spread on Micron options is a full dollar wide, in some strikes closer to two. Retail has bought roughly 68,000 calls into that environment early this morning, with 25,000 to 30,000 filling at the ask or above.
Those traders skipped limit orders and paid whatever the screen was showing in markets that wide.
I spent seven years testing order entry systems at Thinkorswim, every marketable order type and every variant of contingency and stop.
I have never once used a market order in my own trading.
Take the at-the-money at $37. Micron moves up $5 and your call goes from $37 to $39, but you gave up a dollar in the spread to get filled.
Your net P&L on a $5 move is roughly breakeven. A $10 move, which is an exceptional day, takes that call from $37 to maybe $41 for four dollars gross. After spread cost, you made two to three bucks on a $10 move in Micron.
The honest name for that position is charitable contribution to a market maker’s P&L.
The math works against you even when direction is right. The premium baked into every option at 117% IV is enormous, and you need a bigger move than most are modeling to profit net of what you paid.
The professional side plays this game differently.
A serious market participant buys calls and shorts stock against the position to go delta neutral, locking in profitability before the stock moves another dollar in either direction.
If Micron drops ten bucks tomorrow, which is what I am watching for, they are protected. The delta hedge wins regardless of direction.
Retail’s only edge in a setup like today’s is speed. Even that is harder than it sounds at 117% vol with dollar-wide markets and erratic fills.
The first time Micron reverses hard off this all-time high, and it will, the same traders feeling like geniuses today give every dollar back plus fees.
They are not hedged.
This is how retail approaches every gamma squeeze, which is dealers who sold calls having to keep buying stock to hedge, feeding the rally back on itself until it does not.
The cleaner approach is to wait for the squeeze to exhaust.
Watch for volume lightening on pushes to new highs and failed holds of breakout levels. Then look at a put spread 3 to 5% below the reversal with 2 to 3 weeks to expiration.
Implied vol on the put side after a squeeze finishes is much more favorable than chasing calls at peak fever.
You get defined risk and a position working with the mechanics instead of against them.
Watch implied vol on Micron from here.
To your success,
Don Kaufman
P.S. Even if you are bullish MU from here, buying outright calls is not the right play. There are several ways to play it using structured spreads. If you don’t know how to do that, book a call with my team, and they’ll show you what products specialize in these types of setups.
