The month of May has ushered in some eye-popping volatility for Advanced Micro Devices, Inc. (NASDAQ:AMD). Today’s 9% down gap is simply the latest twist in the erratic saga. Allow me to chronicle the herky-jerky action in AMD stock, and suggest an idea (actually, three!) for how to profit.
While AMD’s chart is littered with outsize candlesticks, the swan dive following the early May earnings announcement takes the cake. In 24 hours, Advanced Micro lost 24% of its value.
Talk about a sucker punch.
On a side note, this episode perfectly illustrates the elevated risk associated with holding a high-flying momentum stock like this into these quarterly rituals.
In the aftermath of the earnings disaster, AMD stock found support at its rising 200-day moving average. And, before today’s oopsie, the stock was staging an epic comeback.
Click to Enlarge
From a technical standpoint, AMD remains in a downtrend beneath both a declining 50-day and 20-day moving average. Rallies are always suspect in such an environment.
And while no one could have predicted today’s large down-gap, the fact that Advanced Micro Devices’ recent rally failed shouldn’t be that surprising.
Strangling Profits out of AMD Stock
With the stock’s increasingly erratic behavior, I’m reticent to suggest an aggressive directional bet one way or the other here. I do, however, have a few higher-probability ideas for those looking to lean slightly bullish, bearish, or even neutral.
Bull: If you’re intent on leaning bullish after today’s bloodletting, try
selling the Jun 11 puts for around 45 cents. If the stock sits above $11 at expiration, you will capture the max reward of 45 cents. By shorting the put, you will be obligated to buy shares of stock at an effective purchase price of $10.55 if the put option sits in-the-money at expiration.
Bear: If you think the stock is more likely to tread lower due to its overall downtrend, then consider selling the Jun 13 calls for 31 cents. If AMD sits below $13 at expiration, you will capture the max reward of 31 cents. And if you’re not willing to short shares at a cost basis of $13.31, then be sure to close the call option if it moves in-the-money.
Neutral: Your third and final option is to bet on the stock settling into some type of range over the next month. You could sell a strangle by shorting both the Jun $13 call and $11 put for a net credit of 76 cents. The best-case scenario is to have Advanced Micro perched between both strikes at expiration, allowing you to pocket the 76 cents max reward. Your overall profit zone stretches from $10.24 to $13.76, so a close between either extreme at expiration will yield at least a partial profit.
The profit zone for this short strangle trade is illustrated in the price chart above.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
