With one mostly successful launch by Advanced Micro Devices, Inc. (NASDAQ:AMD) under its belt, AMD stock looks to be at a nice launching point of its own. And for bullish investors believing in second chances both off and on the price chart, a modified options spread is looking like a smart choice.
Let me explain.
Depending on one’s tech-savvy or who you turn to who can break down the bits and bytes, Advanced Micro’s debut of Ryzen, its new CPU for PCs and servers, may have you on the fence. Since its release last week some are saying AMD is back in the game, with the right blend of disruptive architecture and price. Many techies, though, are giving Ryzen mixed reviews.
The consensus appears to agree that if you’re looking for Ryzen to take your breath away for its desktop gaming capabilities — keep looking, or at least give AMD time to improve the functionality. But if it’s workstation performance you’re craving right here and right now, Ryzen delivers.
In other circles of (some) importance, foreign-based investor Mubadala Development has taken an age-old cue from Wall Street and sold into the news. From a SEC filing, it was learned the firm, a long-term holder of the company, unloaded about $615 million of AMD stock. That’s roughly one-third of its position.
Maybe more important is the still massive 97 million share stake owned by Mubadala. In speaking with Reuters the firm stated, more or less, that it was simply time to ring the register on part of their holdings. And as with some uniform but overall modest insider selling of AMD stock by key personnel, I personally can’t fault those parties for taking profits.
AMD Stock Daily Chart
Pullbacks or corrective moves are not very much fun when you’re already long a stock. But the double-digit decline experienced over the past week in AMD is common enough in growth stocks that it’s not worth getting overly alarmed over.
Furthermore, when the price action shapes up as a constructive-looking bottom, the situation offers investors an attractive entry point with risk-to-reward skewed in their favor.
Specifically, AMD stock has established a high-level double-bottom pattern off the prior highs set back in December. The price formation was confirmed Tuesday with a modest signal through the high of the prior session’s doji candlestick.
As well, with the 50-day simple moving average also offering support just below Monday’s pivot low of $12.38 and AMD shares signaling an oversold stochastics condition — investors have a fairly nice technical point of entry and a couple options for exiting if the corrective bottom fails.
AMD Stock Modified Collar
Being optimistic that a bottom is in and with earnings out of the way, as well as one of AMD’s big product catalysts, I like a modified collar in AMD stock as a way to position long. In this spread, the trader buys shares, sells an out-of-the-money call and purchases partial protection using a bear put vertical.
With the modified collar, risk isn’t fully closed off. The vertical only offers intrinsic protective value equal to the width and placement of the strikes used. Further, the hedge value is typically less effective when the expiration is far off and/or using a narrow spread.
The benefit of using the vertical is the reduced cost compared to an outright long put for protection. But given its limitations, this variation is more attractive when company-specific news isn’t on the calendar.
Having said that and with AMD stock at $13.23, selling the April $16 call and buying the April $12/$10 put spread in conjunction with purchasing shares is priced for $13.33, or 10 cents more than the cost of the standalone stock position.
Outside the discussed limitations, on an expiration basis this contains risk to $1.33, at which time the $12 put offers protection for the AMD stock component. Of course, there would be additional losses below $10. However, that’s nearly 25% below current prices and given what’s been discussed, this strategist sees the positioning as an acceptable trade-off.
The real cost to this AMD position is thought to be the sold $16 call used to finance the protective value of the vertical. At the end of the day and prior to any adjustments, the sale does cap the trader’s upside potential. Bottom line though, given that’s nearly 21% higher, we’re personally very receptive to that type of less-pressing challenge.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
