Advanced Micro Devices, Inc. (NASDAQ:AMD) reported a profit that few saw coming Tuesday night, and the stock is soaring Wednesday in response. Most experts would tell you that you missed the rally — after all, AMD stock is now 9% higher than mere hours ago. To make matters worse, markets are at all-time highs and seem they are overstaying their welcome up here.
I would say the doubters are wrong.
So how do I still initiate a bullish long in AMD stock after a massive move like this? Easy. I repeat what’s worked for me already several times this year: Generate income by selling downside risk against value. In other words, I sell puts for income.
The Setup
I have to admit that my method is easier to pull off on dips because put premiums would be juicy. I would then sell risk against extreme scenarios that others fear, and those scenarios never occur, thereby leaving me with profits as the premiums expire worthless in my favor.
Using Advanced Micro options opens this opportunity for me, but that doesn’t mean I should sell premiums willy-nilly. The same homework is necessary to do this as the one to buy the underlying equity itself, meaning I only sell puts in companies I want to own. Otherwise I may find myself long something in which I don’t believe.
Forget AMD for a second. The whole chipmaking industry is full of momentum stocks at the moment, and they’ve left us with few obvious entry points. They’re all up massively from just 12 months ago. AMD is up 115%. Nvidia Corporation (NASDAQ:NVDA) is up 190%. Furthermore, at their lowest point in the past six months, they were still up 50% and 60% from six months prior.
Click to Enlarge If you waited for a perfect entry sign, you’d never end up trading these.
Fundamentally, Advanced Micro Devices is not cheap, but I’m not here to argue buying the value. I’m selling risk against what Wall Street perceives as value, but with a big buffer so I can leave room for error. I have to be extra careful choosing levels so I don’t end up managing my risk on the first dip in AMD stock.
Here is a trade that I shared in May that paid profits without breaking a sweat. I repeated performance in June, and that paid even faster. Today would be a rinse-and-repeat, if not for the fact that this entry point is less obvious long than the other two. (I’m going long after a big rally.)
How to Trade AMD Stock
The bet: Sell the Jan 2018 $11 put and collect 75 cents to open. Here I have an 80% theoretical chance of success. I need shares to stay above my strike price for maximum gains. Otherwise I own the shares at my strike and suffer losses below $10.25.
So, yes, I am chasing a rip after the fact. But I do this with a lot of profits in hand already and I am leaving 25% as room for error. So if AMD stock goes against me and I own the shares between now and expiration, then I do so at a deep discount. That would be totally acceptable to me given the current scenario.
Selling naked puts is intimidating and requires margin. I can moderate this trade by selling a credit put spread instead. There, my money at risk is limited.
The more moderate bet: Sell the Jan 2018 $11/$10 credit put spread, where my reward would be 20% in yield. That’s a lot more attractive than hoping for another 20% directional move in AMD stock … though admittedly, it’s a better chance with Advanced Micro Devices than it is with many other equities.
There are no guarantees when investing in the stock market, so never bet more than you am willing to lose.
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.
