Advanced Micro Devices, Inc. (NASDAQ:AMD) still has an awe-inspiring rally on its hands even after today’s 20% dip. Over the past year, AMD stock still sports a nearly 200% run, and shares are more than 550% better than they were back in summer 2015.
The challenging part of rallies this big is trying to get in. Many investors have been too scared to jump on, like trying to board a merry-go-round when it’s going too fast. No one wants to buy high then be forced to sell low, so they keep waiting for a dip to buy that might never come.
The flip side is that after massive rallies, the dips usually are not gentle. Case in point: The 19% plunge in AMD stock following its first-quarter earnings report. Again, investors don’t want to catch a falling knife too soon, so they stay out.
However, you can still make money off momentum stocks through the options markets. Just recently, I shared a bullish AMD trade that created income out of thin air. This works in the other direction since a few weeks earlier I shared an AMD short that also paid well.
So what can we do today amid this eye-popping decline?
Fundamentally, I don’t have to argue much for AMD. The chip sector is booming and should continue to prosper off the extreme digitization of our everyday lives. Companies like Advanced Micro Devices, Intel Corporation (NASDAQ:INTC) and Nvidia Corporation (NASDAQ:NVDA) are the brains that support technology.
Really, this dip in AMD is mostly about potential margin compression.
Click to Enlarge From a technical standpoint, going long on this dip is fraught with danger. If AMD loses the current pivotal zone, it could invite momentum sellers and retest even lower levels. This zone served as support on past dips and needs to repeat performance.
Today, I will share a trade that bets on the bounce sooner rather than later.
How to Trade AMD Stock Here
The bet: Sell the Oct $8 naked put and collect 50 cents per contract. I have 85% certainty that my trade will expire worthless in my favor. If not, then I own it at $8 per share.
Although I am betting on a bounce to come, I don’t need it to profit. I only need AMD stock to stay above my sold puts to win and. Otherwise, I would be put the stock at that price. If I am not willing and able to own Advanced Micro shares at that price, I would change this trade to a credit put spread and still yield 12% on risk.
Someone who wants to be even more bullish AMD can buy calls awaiting another rally.
Me? I prefer betting on the value below rather than chase an upside target.
Email sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar here. 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.
