If you seek clarity or want immediate support from the price chart, please look past Advanced Micro Devices, Inc. (NASDAQ:AMD). But if you don’t mind a contrarian bet offering value, look no further than AMD stock, which is up Monday on news that its new Vega chips have already sold out.
A couple weeks after Advanced Micro reported solid quarterly results, shareholders have been punished. AMD has been bludgeoned by nearly 25% at Friday’s low of $11.88 before closing fractionally higher at $12.23. If you like labels, AMD stock officially entered bear territory.
Adding salt to the wound is that the bearishness follows AMD’s solid earnings beat, upwardly revised guidance and initial 10% spike to marginal intermediate highs.
So, what gives? Despite AMD’s impressive quarterly results, GAAP profitability still isn’t a reality and cash flow burn has yet to be extinguished. That could be a culprit. However, given Advanced Micro’s successful execution in rebuilding its brand and on track to clear up those issues entering 2018 — my two cents are those investors need to keep an eye on the big picture.
Could it be an analyst community that has been less than enthusiastic during AMD’s business rebirth? Actually, reaction after the earnings announcement was a bit mixed, but mostly improved by Wall Street’s sell side. In fact, among the several price target hikes, a handful were above-market raises.
But how about word of United Arab Emirates-based Mubadala Investment Co. selling 40 million shares in the aftermath of earnings? Surely, that has left its mark on AMD stock and other investors?
The action from Mubadala has had an impact, no doubt. The substantial sale amounts to roughly 4% of the Advanced Micro Devices float. It’s also the second round of selling following a similar-size 45 million-share sale back in March.
Still, the two transactions leave Mubadala with a still massive 13% stake while remaining AMD’s largest shareholder. With Mubadala now sitting on locked-in profits in its remaining position, is it really something to be worried about?
Advanced Micro Devices’ Chart
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AMD stock officially touched into bear market territory, if we’re to believe blanket declines of 20% matter in redefining price trends. Personally, I don’t, and there’s good reason to be skeptical.
Market history dictates buying into similar size weakness over time rather than fleeing in fear of something more technically horrid is a sound way to build profits. I’m optimistic this is the case for Advanced Micro.
There are no guarantees, of course, but I think one outcome could be the development of a third significant low, followed by another intermediate-term higher-high. Those would be points Nos. 5 and 6 on the provided chart.
To buy on weakness in AMD requires buying when others are fearful, with blood on the price chart. It’s not easy, but the strategy does work. What’s more, we have options to keep our risky business less daring.
How to Trade AMD Stock
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Given what I’ve said above, consider a Jan $13/$17 call spread. With shares at $12.21, the vertical is priced for $1. If AMD stock firms up — which it appears to be doing this morning — and everything goes as planned, a profit of $3, or 300%, is possible above $17 at expiration. As the two prior highs are five months apart and this is a January spread, there’s some nice time symmetry if the price action continues to rhyme.
Personally, if Advanced Micro did rally a couple more points, I’d seriously look at adjusting the vertical into another modified butterfly.
If our vision doesn’t pan out? The spread maintains a fairly soft 25 delta directional bias, so a money stop of 50% should minimize potential losses while avoiding a premature exit.
Investment accounts under Christopher Tyler’s management currently own positions in AMD stock and / or AMD derivatives, but no other securities 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 and StockTwits and feel free to click here to learn more about how to design better positions using options!
