According to my IDEAL stock rating system, no stock in the S&P 500 is more oversold right now than Western Digital (NasdaqGS: WDC). After peaking above $106 in March, its share price has steadily declined over the past seven months to below $60.

Some of that decline is warranted given the company’s reliance on NAND memory devices for much of its profitability. NAND prices are expected to fall through the middle of next year, narrowing profit margins for WDC and its competitors.

However, now priced at less than five times forward earnings, WDC is grossly undervalued. To justify its current share price, Western Digital would have to post flat earnings for the next three years.

That’s highly unlikely given the cyclical nature of the memory device market. As more smartphones and other portable computing devices incorporate 3D/AR/VR apps, demand for flash memory (including NAND) is projected to grow 35 – 45% annually over the next seven years.

Western Digital is scheduled to release its Q3 results on October 25, which I expect will be less pessimistic than its recent share price would suggest. However, that overblown pessimism is why we can write a put that is more than 10% out-of-the-money and expires in three months with an option premium yield of 3.5%.

Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.

How to Make the Trade:

• Trade: Sell to open the January 18, 2019, $50 put option on Western Digital (NasdaqGS: WDC).
• Symbol: WDC190118P00050000
• Limit Order Price: a credit of $1.75 or more.

Tell your broker: “I want to sell a put on Western Digital stock. Specifically, I want to ‘sell to open’ one $50 Put that expires on January 18 for a credit of $1.75 per share or more.”

Note: Sell one put for every 100 shares of Western Digital stock you would be pleased to buy at $50 per share. Investors should set aside $5,000 per contract sold to buy the stock in case the option expires in the money.

Further Instructions Regarding the Trade:

• • If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least equal to the Limit Order Price specified above.
  • Place your limit order on a “good ’til canceled” (GTC) basis and be patient.