If you’ve been waiting or hoping to pick up Advanced Micro Devices, Inc. (NASDAQ:AMD) at more opportune levels, now may be the time. However, don’t discount a bottom not being in just yet — use a more secure put credit spread for positioning in AMD stock. Let me explain.
Was it really a bad report in AMD stock? Or was it more a matter of expectations being too high or supply worry tied to a 97-million-share lockup expiring from an overseas investor? In our view, with shares of Advanced Micro Devices plunging over 20%, it is something to think about.
For algorithms or lesser disruptive day-traders, the difference is irrelevant. But for investors with longer horizons, AMD’s tumble appears, in our estimation, to be a nearsighted overreaction tied to mixed — but not terrible — Q1 numbers, but a good deal more of the latter two elements.
Bottom line, Advanced Micro’s report was far from perfect. Management did disappoint in offering slightly weak gross margin guidance and higher spending had some investors expressing concern.
On the other hand both revenues and earnings are clearly moving in the right direction for a turnaround play such as AMD. And now shares are back where they were in front of Q1’s earnings report.
To boot, Q2 midpoint sales guidance did come in above Street forecasts. Further, AMD management could be conservatively sandbagging as it tries to temper expectations after years of disappointing on its promises to investors.
Lastly, with just the first of more than a few new product introductions readying for the market, buying into the AMD 2.0 narrative appears to still deserve the benefit of the doubt after a hard kick from investors.
AMD Stock Daily Chart
When I last wrote about AMD stock in early April, my technical stance for shares had grown a good deal more cautious. More than respecting a bearish sell reiteration by Goldman Sachs, price action did forcefully affect a failed momentum situation and breakdown of a longstanding uptrend line. And that was worth paying some attention to when positioning.
Looking at the current situation and following Tuesday’s gap gutting, AMD stock is now about picking up a growth story that has gone from a punch-bowl situation to one more aligned with being knocked out or, more optimistically, showing a good deal of blood on the street.
Backing this contrarian bullish view, AMD is trading inside a support zone defined by a cluster of Fibonacci support and the 200-day simple moving average which spans from $9.80 to $10.90. That’s nice to consider, but I wouldn’t personally draw a simple line in the sand for exiting if breached.
I’ll leave off with the caveat that I don’t see Advanced Micro Devices as a rainbows and puppy dogs situation. And with stochastics far from confirming a bottom, I’d be hesitant to call one right now. However, if AMD stock was to continue to test investors wherewithal, I’m of the mind one man’s bear territory is definitely another’s street address for value.
Advanced Micro Devices Credit Put Spread
In our last analysis, I discussed a defensively designed collar where the protective put was stationed closer to AMD stock than the sold call. Un-adjusted, the strategy would have saved traders more than 50% of Tuesday’s heartache versus simply having held long stock.
Given the new price information and sentiment in AMD stock, a collar could still be considered. However, for an investor looking right now to begin building a position, using a starter variation on that strategy with an out-of-the-money bull put spread, is attractive.
One such credit spread that looks appropriate is the weeklys 2 June $9.50/$8.50 put vertical priced for 24 cents mid-market with AMD stock at $10.32. By initiating a long with this spread, the trader is in position to keep the full credit as long as AMD doesn’t drop by an additional 8% or more.
The downside to this strategy is really the upside in shares of AMD. At the end of the day, if AMD were to rally significantly in the near-term, this trader keeps the credit but ultimately would have been better invested in shares.
Personally, giving up upside in AMD stock is a risk or trade-off that I view as appropriate for the circumstances. On the actual downside, which I’ve already touched upon, with a worse-case purchase price of $9.26 you aren’t likely to be buying alongside Warren Buffett, but he might appreciate the investment style nonetheless.
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.
