Advanced Micro Devices, Inc. (NASDAQ:AMD) is a recently fallen star, but most other stocks would be so lucky to decline by more than 30% from recent highs and still be 170% higher than a year ago. However, the drop in AMD stock is not reflective of a sudden change in fundamentals, but mostly normal price action after its meteoric rise.
Having said that, it’s still daunting to try to catch such a precipitous fall such as the one Advanced Micro has just gone through.
That’s why I like options. If I buy AMD stock right now, I’m risking 100% of my money right here, without buffer. However, options allow us to structure dozens of ways to profit — even in ways that don’t require a rally!
Fundamentally, Advanced Micro Devices is still expensive, but the company sits in a place of necessity. The world is becoming increasingly technologically driven, and AMD supplies the chips that serve as the backbone of this reality.
Click to Enlarge Technically, Advanced Micro Devices is at the neckline of what could be another bearish pattern, which if broken, could invite more momentum sellers and maybe even retest the $8.50 level. But the $10 per share level has been pivotal since last December, so there is likely to be support.
Today, I’ll share a way to start a long position in AMD stock with little out-of-pocket risk that will let you double your money this year.
How to Trade AMD Stock
The Bet: Buy the AMD July $11/$12 debit call spread for 20 cents per contract. This is the maximum I could lose if Advanced Micro Devices fails to rally past my spread by July.
Although by definition, a spread is already hedged, usually I like to further mitigate my risk by also lowering my out-of-pocket expense. In this case, I could enter into a credit put spread that would offset the cost of buying the calls.
I can do this now or wait out a candle or two to see if the selling in AMD stock has abated.
The Bank (Optional): Sell the AMD Jan 2018 $7/$5.50 credit put spread and collect 35 cents per contract. Here, I have an 80% theoretical certainty that the price will not breach my sold risk. (If it does, I’m open to losses.)
Taking both trades would result in a net credit, so I don’t even need a rally to profit. I start with a credit, and as long as AMD stock stays above my sold puts, any premium I collect from selling the call premiums would be incremental greens.
Since both trades are uni-directional and bullish, it wouldn’t be a bad idea to stagger entries. This is especially important in a falling knife situation — if AMD stock falls further before bouncing, I won’t have entered my entire position at the same time.
E-mail 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.
