Volatility seekers are flocking to Advanced Micro Devices, Inc. (NASDAQ:AMD) in droves. And why shouldn’t they be? AMD stock jumps around more than a bucking bronco. The hot semiconductor stock traded in a 22% range over the past four days alone. With the S&P 500 stuck in snooze mode, it’s refreshing seeing a stock buck the low volatility trend.
But let’s be honest. The real reason why AMD stock finds itself in the crosshairs of traders across the land is its upside volatility. Before April’s earnings oopsie, the stock was delivering profits month after month to shareholders.
If the past few days are any indication, it appears Advanced Micro Devices is itching to return to its uptrending ways.
Advanced Micro’s Charts
Traders lost in the minutia of day-to-day gyrations can always benefit from viewing a weekly chart. It brings clarity along with a reminder of longer-term trends.
Here’s what sticks out to me for AMD:
First, there is no doubt the bears drew blood during April’s earnings bloodbath.
The selloff was sufficient in breaking a weekly support level (#1 in chart) weakening the uptrend in the process. To be fair, this was bound to happen at some point. Even hyper-growth tech stocks like AMD can’t keep up the pace of doubling in value every few months. Perhaps the stock will settle into a more sustainable trend now.
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Second, while the recent downturn weighed heavily on the Relative Strength Index (RSI) indicator, it only briefly went below the 50 level (#2 in chart).
Traders view this level as a demarcation line separating the bull (above 50) and bear (below 50) zone of the RSI. With this week’s price pop, the RSI climbed back to 54, placing it in the heart of the bulls’ territory. This bodes well for AMD stock moving forward.
Third, we’ve seen two weeks of accumulation (counting the current weekly candle) since April’s plunge (#3 in chart).
The double dose of institutional buying is certainly a positive omen. Typically a disappointing earnings announcement keeps a lid on the stock for the following quarter. Spectators often want to see that the coast is clear before piling back in. This usually comes in the form of the next quarter’s earnings release (if it doesn’t suck, of course). But this isn’t happening with AMD. Trader seem all too willing to pile back in right now.
Two items of note on the daily chart are last week’s formation of a higher pivot low and Wednesday’s close above the 50-day moving average. The former signals increasing demand for AMD shares. The latter is notable primarily because we haven’t closed above the 50-day in months.
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In the short run, AMD is overbought. But make no mistake, dips remain a buy in this puppy.
How to Trade AMD Stock
The cheap price tag and elevated volatility make for a killer combo if you’re an option seller. AMD’s low share price keeps the cost minimal for strategies like naked puts or covered calls. And the elevated volatility keeps option premiums pumped up granting a bigger pay-day for those willing to sell them.
If you’re ready to wager AMD stock sits above $11 at July expiration, then sell the Jul $11 put for 40 cents or better. The initial margin requirement should be around $110 which means the potential reward of $40 (40 cents x 100) is a mouth-watering 36% return on initial investment.
By selling the put, you are obligating yourself to buy 100 shares of stock at an effective purchase price of $10.60. If you’re not willing to accumulate shares down there, then buy back the put if Advanced Micro Devices falls below $11.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
