Advanced Micro Devices, Inc. (NASDAQ:AMD) put together an incredible 400% rally over a 12-month period. While AMD stock is recovering on Friday, up nearly 1% before the close, it has given some of that back. But if you bought at the lows, you’re a happy customer.
Therein lies the challenge.
When stocks get this hot, they become almost impossible to enter long with conviction. At any point along the 400%-plus rally, AMD shares would have seemed overextended, thereby keeping most investors out waiting for a dip that never came. Shorting it along the way was even scarier.
To avoid this, I used options to make entry points relatively easy. For instance, in early December, I laid out a bullish trade on Advanced Micro Devices that paid well with no money out-of=pocket. Today, I will share how I can do the opposite using the same methods.
I won’t spend much time arguing AMD’s fundamentals. The world is becoming extremely dependent on tech and AMD is one of few suppliers to the brains of the machines that run them. There is enough business to fuel the success of it and others like Intel Corporation (NASDAQ:INTC).
Also, before you get too filled with rage, realize that I’m not shorting the company’s prospects. I’m merely bettering on price action in AMD stock. In fact, I’m leveraging the perceived value in Advanced Micro to finance my bet.
How to Trade AMD Stock Here
The Trade: Buy the May $13 put for $1 per contract. This is my maximum potential loss. Technically, AMD stock looks perched at a must-bounce level that, if lost, could retest $12.20.
To reduce my out-of-pocket exposure, I will use fundamentals for balance.
The Bank: Sell the Oct $11 put and collect $1.30 per contract. Here, I have a 60% theoretical chance of expiring for maximum gains. But if AMD stock falls below my sold put, I would be committed to buying it at $11 even if it falls lower.
Taking both trades resulted in a 30-cent net credit. So as long as AMD stock stays above $11 through mid-October, I will be profitable even if Advanced Micro Devices rallies to new highs. Any premiums I recover from selling the May puts would be incremental profits.
Effectively, I am being paid to short AMD.
Learn options as easy as 1-2-3 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.
