Is recent stock weakness in Advanced Micro Devices, Inc. (NASDAQ:AMD) offering investors an early warning to make an exit? Or is this a bullish opportunity to buy? Today, we’ll look at the current setup in AMD stock, then present a strategy that will provide profits without piling on the risk.
It has been just more than a month since I last penned a mostly optimistic take and strategy on AMD. Shares of Advanced Micro are mostly unchanged for the period, but beneath the surface, there has been a good deal of price volatility to ponder.
The most striking catalyst during this period was a surprising initiation from Goldman Sachs. Last week, the firm slapped AMD stock with a “sell” rating and $11 price target roughly 20% below the prior night’s close. The bearish coverage was good enough to send shares more than 6% lower in a single session.
Analyst Toshiya Hari did note many improvements at AMD under the stewardship of CEO Lisa Su. In his view, product launches, cost management and deleveraging of the company’s balance sheet have all been well-executed. However, given 2016’s substantial 300%-plus gain and relatively steep multiple, Hari warned strongly that Advanced Micro Devices was also “priced for perfection.”
Also, analysts expect that an unfavorable price war with both Intel Corporation (NASDAQ:INTC) and Nvidia Corporation (NASDAQ:NVDA) would occur at Advanced Micro’s expense.
Is it time to listen to Goldman? One could use it as a starting point. However, Goldman’s calls — beyond their short-term influence — aren’t exactly the gold standard. I’d prefer to look at what others have to say and maintain an open mind.
AMD Stock Chart
Click to Enlarge
Shares could always snap back aggressively with a bullish earnings reaction. But for now, Goldman’s knockdown of AMD stock essentially pulled the rug out from what had been a nicely-developing momentum situation.
Maybe Goldman is, as alum and CNBC personality James Cramer suggests, merely “taking away the punchbowl” for AMD — but a company that remains on track to grow its business and capture market share?
AMD’s chart does more accurately reflect a punchbowl situation. And there’s nothing wrong with embracing this type of more technically driven entry into shares.
Just don’t play Advanced Micro Devices too loosely.
How to Trade AMD Stock
I think Advanced Micro is a buy amid a short-lived corrective move, but I want to better control risk than just a simple stop-loss methodology.
Right now, I suggest the May $15 call/$12 put collar. With shares at $13, the package is priced for $13.20. For the 20-cent cost or additional premium paid over simply owning shares, the investor is fully protected below $12.
Technically speaking, the collar’s insurance makes sense. A low of $12.38 back in early March does appear to be significant in maintaining, while still allowing for a smidgeon of wiggle room down to the $12 put.
AMD’s next earnings report is scheduled for May 1. In our view, the real cost of this collar is the earnings report, or maybe a product update. Then, there’s a significant shift of bullish momentum in shares. Remember, the $15 call is being sold to finance the protective put. So without any adjustments, the call sale does initially cap upside at 12%.
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.
