Interest Rates are Rising — Is Advanced Micro Devices, Inc. (AMD) Stock Far Behind?

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As expected, the U.S. Federal Reserve raised interest rates on Wednesday afternoon. The overnight interest rate was raised by 25 basis points. This was not a shock to most traders and investors, as a rate hike was expected especially after solid unemployment numbers were released on Friday.

Interest Rates are Rising -- Is Advanced Micro Devices, Inc. (AMD) Stock Far Behind?

One thing that can be shocking that affects the market is mergers and acquisitions. If you have ever been long a position on a company that has been taken over, it is quite the pleasant surprise particularly for your P&L.

Just on Monday, long position holders of Mobileye NV (NYSE:MBLY) were ecstatic that shares suddenly moved higher by about 34%. Many traders and investors will then start to think what company may be in that same position of being bought?

Take a look at a recent article written by Larry Ramer. He points out that Advanced Micro Devices, Inc. (NASDAQ:AMD) looks attractive for several reasons, including the price and their highly regarded new chips and processors.

With the stock trading the neighborhood of $14 a share, it not extremely expensive compared to the likes of an Amazon.com, Inc. (NASDAQ:AMZN).

That being said, buying 100 shares will set a trader or investor back about $1,400 ($14 X 100). An option trader can set-up a bullish position for less capital for a certain amount of time with substantially less risk then just buying the outright.

AMD Stock Trade Idea

The Rationale: The two most popular bullish positions using options are to either buy a call option or buy a vertical debit spread (bull call). Each has pros and cons. The long call position has unlimited profitability, like a stock position, up until expiration, but it comes with a cost of time decay.

Options are a decaying asset, and every day that passes the option loses value due to time unlike stock.

A vertical debit spread can cost less than buying a call position, can neutralize time decay depending on how it is set up, but it also limits any additional profits above the short strike.

Since this trade idea is speculative and based on a potential increase in price due to either a takeover or a simple move higher, July expiration will be chosen, giving us over 125 days until expiration. This may be too long or short but it does give the stock a considerable time to move higher.

The Trade: Buy the Jul $12/$16 bull call spread (buying the Jul $12 call and selling the Jul $16 call) for $1.75 or less.

The Strategy: The maximum potential profit for this trade is $2.25 ($4 – $1.75) if AMD is trading at or above $16 at Jul expiration. The maximum loss is $1.75 (or what was paid for the spread) if AMD is trading at or below $12 at Jul expiration and the position was not exited. Breakeven is $13.75 at expiration based on a cost of $1.75.

With AMD at the time of this writing trading above the breakeven point ($13.75), the position will not lose value due to time decay. This is an advantage versus a long call position. Maximum profit is capped for this spread no matter how much the stock may finish over $16 at $2.25. A non-spread trade like a long call would not be subject to that restriction.

However, buying the Jul $12 call on its own would cost an option trader $3.20 at the time of this writing. The spread is a cheaper alternative.

As mentioned above, the spread can still profit if the stock moves higher without being acquired. Consider managing the position with a certain profit and risk amount in mind aside from a potential takeover candidate. Good luck!

John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at john@markettaker.com. At the time of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/advanced-micro-devices-inc-amd-stock-rates/.

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