Advanced Micro Devices, Inc. (NASDAQ:AMD) has put on an incredible show. Sure, the entire sector is in the midst of a breakout, but the 500%-plus 12-month performance of AMD … well, it sticks out.
We are now living in a world that is becoming more digital at an alarming rate. Advance Micro Devices is one of few suppliers of the brains of the machines that now run our lives.
But how do you trade a stock that is up more than 500% in a year?
You use the options markets.
I love options because they allow me to leave room for error. I recently wrote about a trade in which you could play AMD stock for free, and that has been an easy win. Today, I plan to reset a similar trade, just on different time lines.
How to Trade AMD Stock Here
The trade: Sell the Jan 2018 $10 put. This is a bullish trade for which I collect $1.25 to open. I only sell naked puts if I am able and willing to own AMD stock at the strike sold. If price falls below it, I would be put the shares. Anything lower than $8.75 per share would accrue losses down to zero.
Not everyone is comfortable selling naked puts. For those, I can morph the trade into a credit put spread instead.
The alternate: I collect 75 cents per contract to sell a Jan 2018 $10/$7 credit put spread. This too is a bullish trade but one with a finite risk profile. The 32% buffer from current price leaves either trade with a 70% theoretical chance of success.
Usually I like to hedge my bet by selling upside risk to balance the trade. In this case I will wait a bit before doing that. Even then I may opt to add a credit call spread, but in the Technology SPDR (ETF) (NYSEARCA:XLK) instead. Either way, I am not doing it today. This market is too hot.
I chose longer-dated contract to make the management of price gyration easier. Given enough time, I am confident I can manage my risk around price drops. I can defend these bullish trades through iffy periods by using cheap debit put spreads if needed. I use options because of the margin of error that I can incorporate into my trades. If I buy the stock I put my money at risk immediate and with no buffer.
I am not obliged to hold my options trades on AMD stock open through expiration. I can close any of them at any time for partial gains or losses.
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.
