On its last dip in early May, I shared a trade in Advanced Micro Devices, Inc. (NASDAQ:AMD) that delivered free profits in mere days. I have since booked it since I don’t want to overstay my welcome in winning trades. Today I want to reset another bullish AMD stock trade but I will only sell risk in this one without buying hopium.
Usually when a quality stock corrects as hard as AMD stock recently did, it sheds enough froth that it becomes easy to sell downside risk against support lows. But that’s not the case here. Even after falling 35% from its 52-week highs, Advanced Micro Devices is still up over 160% in the past year.
So this makes it imperative that my homework be thorough enough to find the key support levels that are not so obvious.
Fundamentally I cannot argue for bargains. The stock is not cheap, but markets are pricing in future value. Our world is becoming so dependent on technology that there will no doubt be room for AMD and all its competitors to thrive.
Once the Intel Corporation (NASDAQ:INTC) rumors abate price should settle down.
Technically AMD stock trades like a momentum stock, and when it rallies, it’s hard to find entry point. Conversely, when it falls few traders are brave enough to catch the falling knife. So many stay out, never seeing the perfect opportunity. This is where AMD options come into play.
Click to Enlarge Using the options instead of trading the stock allows me to structure trades with room for error, thereby reducing the need to be surgical in entry and exit points. I also find it important to zoom out into weekly charts to eliminate the short-term noise. This allows me to better evaluate the relativity of the current price.
The massive size of the AMD rally tells me that markets had it wrong at $4 per share just like they were too early for $40 in 2006. Somewhere in the middle usually lies the truth, but for what period of time?
Today I will assume that equity markets are in the Trump era so for this trade purpose I will evaluate AMD’s post-election-period-to-date. Now at $11 AMD fans and hater are battling over the middle of that range. Bull and bears are in balance so going long here should not be a grave mistake.
Yet instead of risking $11 per share to buy the stock at face value and without any buffer, I will employ AMD options. My thesis will be that the stock will find buyers if it hits pre-Donald-Trump-era levels.
AMD Stock Trade Idea
The Bet: Sell the AMD Jan 2018 $8 put for 75 cents where I have an 80% chance of success. But if AMD falls below $7.25 per share, I would accrue losses. I will not sell opposing risk to balance my trade since I have a 25% buffer. I am comfortable that I will be able to manage my risk short-term against price gyrations.
Selling naked options is risky and I only do it if I am willing and able to own the shares. I could also buy cheap July sacrifice puts to guard against a disastrous earnings report.
Learn how to generate income from options 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.
