How to Buy Advanced Micro Devices, Inc. (AMD) Stock the RIGHT Way

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Bears fired a shot across the bow in Advanced Micro Devices, Inc. (NASDAQ:AMD). The recovering chipmaker has fallen 16% from its highs over the past week amid heavy profit-taking. The million-dollar question is whether this is yet another in a long line of buyable dips for AMD stock, or if it’s the beginning of a more ominous reversal.

AMD stock chart view 1
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Source: OptionsAnalytix

Let’s investigate the price action to see if there are any clues to be had.

For starters, the selling sortie was sufficient to break AMD’s 20-day moving average. Chalk it up as a minor victory for the bears, but more work remains before the entrenched uptrend is reversed. Thus far, prior support has held strong in the $12.50 zone. Until that levee gives way, the uptrend deserves the benefit of the doubt. Plus, AMD stock remains above rising 50-day and 200-day moving averages.

A second feather in the bears’ cap is the substantial volume accompanying the decline. The trio of distribution days suggests institutional selling, the likes of which could weigh on the stock for days to come. This should temper the enthusiasm of those rooting for a swift recovery from this price dip.

It’s more likely that AMD chops around a bit to work through further supply before climbing anew.

How to Win With AMD Stock Right Now

Fortunately, the options market provides a strategy well-suited for a situation like this.

Let’s say you’re willing to step in and buy this dip, but you want a bit of a buffer in case AMD shares fall 10% to 20% further before finally rebounding.

You could sell the Apr $11 put for 35 cents or better. Worst case, Advanced Micro Devices sits below $11 at expiration, and you are obligated to buy 100 shares per contract sold at an effective purchase price of $10.65. From there, you could begin selling covered calls to further reduce your cost basis.

On the flip side, if AMD stock remains above $11 by expiration, the put option will expire worthless, allowing you to pocket the 35 cents per share ($35 total).

The initial margin requirement for the naked put should be around $120, so although $35 doesn’t sound like a large reward, it comes out to an impressive 29% return on the initial investment.

As of this writing, Tyler Craig held naked puts in AMD.

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/how-to-buy-advanced-micro-devices-inc-amd-stock-the-right-way/.

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