A relatively dismal start to 2017 for Advanced Micro Devices, Inc. (NASDAQ:AMD) received a bit more negative feedback Wednesday. But before anyone cries out “Bear Market!” let’s examine AMD stock both off and on the price chart for clues about why, as well as check the options market for a suitable strategy.
2016 was the best of times for AMD stock and for good reason. Investors cheered a massive turnaround in the chipmaker’s business attributed to strong execution, design wins with Microsoft Corporation (NASDAQ:MSFT) and Sony Corp (ADR) (NYSE:SNE) and even a return to non-GAAP profitability after flirting with bankruptcy not so long ago.
The strong reboot didn’t go unnoticed on AMD stock either.
Investors witnessed a massive bullish reversal from a January 2016 low of $1.75 to a high of $12.42 by late December. AMD’s near-300% gain in 2016 also put the outfit atop the semiconductor group in share price performance.
But 2017 hasn’t been as kind out of the gate. Nearly one month in and with the Nasdaq 100 up over 5%, AMD stock has shed roughly 7%. What’s behind the about-face and relative weakness?
Some investors could rightfully be looking ahead and concerned that while good progress has been made in Advanced Micro’s fortunes, more is required and 2017 could prove pivotal.
From the introduction of next-generation, high-end graphics and computing chips to the need to increase market share across key business segments and continuing to build on its bottom-line and cash-flow, there are clear challenges facing Advanced Micro Devices this year.
If AMD falters or altogether fails to execute, shares are likely to be targeted by bears. But first things first. Under the leadership of CEO Lisa Su, who took over the role in 2014, AMD has been rising to the occasion with concentrated bets and surpassing most analyst expectations.
And with analyst sentiment still somewhat cool on Advanced Micro Devices’ prospects and AMD stock affording a lower-risk entry, a bit of optimism on the price chart and margin of safety afforded from a hedged AMD position could be well-served.
AMD Stock Daily Chart
As mentioned, shares of AMD are off by about 9% year-to-date. From December’s high the past month though, corrective activity has resulted in a run-of-the-mill but nice-sized dip of 24% in shares at the recent low of $9.42.
Pullbacks like AMD’s are common after a substantial price run. In fact, declines of up to 30% are considered quite normal if for no other reason than ordinary profit-taking, which quite honestly doesn’t require a bearish shift in the narrative.
And technically, with AMD shares having tested 2010’s pivot high and the 50-day simple moving average, there are a couple more reasons to embrace, rather than fear, today’s and this year’s weakness in AMD stock.
AMD Stock Collar
Reviewing AMD stock’s options and with shares trading at $10.29 Wednesday evening, the March $12 call/$9 put collar is attractive.
Priced for even money, the package price of $10.29, and equivalent to a naked long stock purchase, allows for guaranteed downside protection at $9 in AMD from the purchased put. The insurance policy of sorts is slightly below the recent technical low and a desirable level to protect the stock position for possible re-evaluation if required.
As earnings in AMD stock are on tap next week, the collar’s protection versus the more open-ended risk alternative, becomes even more attractive in our opinion. So, what’s the catch?
The real cost to this AMD position is the matching credit taken in to finance the long put. At the end of the day, the trader has sold a call at the $13 strike.
However, as the initial cap on profits is set at 16.6% for slightly less than a two month holding period—there’s no alternative facts to suggest this strategy is anything less than a great way to manage risk.
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.
