In early December, I laid out a bullish trade on Advanced Micro Devices, Inc. (NASDAQ:AMD) that paid well without much trouble. Today, however, I’m taking the other side of AMD stock with some house money.
Before you take up pitchforks and torches, a reminder: A short trade isn’t necessarily a criticism about the company itself. This idea on AMD shares is a simple price action trade.
Click to Enlarge In fact, the fundamentals for Advanced Micro Devices have hardly changed since my last write-up. It’s just that I look at the technicals, and I don’t like the upside prospects. Specifically, the recent insane run-up in the sector leaves a lot of weak hands below. AMD stock ran up some 400% in 200 bars.
Should the sector fall out of favor, the selling could come fast. Other names in the sector include superstar Nvidia Corporation (NASDAQ:NVDA) and Intel Corporation (NASDAQ:INTC). Recently, I also wrote about how I successfully shorted NVDA.
Today’s trade on AMD stock will be on medium-sized conviction, as I’m not arguing against AMD’s fundamentals.
How to Trade AMD Stock Here
The Bet: Buy AMD Feb $11/$10 debit put spread for 40 cents per contract. This is my maximum risk. If AMD stock falls through my spread before expiration, I stand to double my money.
I purposely chose a near-the-money spread so I only have to guess direction. I could have gone lower to the $10/$9 debit put spread and have a chance at a triple, but that would require a bigger dip out of AMD stock.
I usually like to hedge my trades. Luckily, I come into this one with winnings from my previous AMD trade. I like putting some house money to work into the potential short-term flip.
In this case, since AMD has had a steep rise, I am not certain of levels against which I can sell my usual bullish risk. Instead, I will sell credit call spreads in the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ). This will further increase my bearish bias, but with diffused caution.
The Bank: Sell the QQQ Feb $124/$125 credit call spread. This is a bearish trade for which I collect 14 cents per contract to open. This trade has could yield 16% profit with an 80% theoretical chance of success. However, since I only have a 5% buffer from current price, I would delay entry here for a day or two to see if I even need it.
This is a new year, and bulls could be ready to roll.
I am not required to hold either trades through expiration. I can close either for partial gains or losses at any time.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
