Advanced Micro Devices, Inc. (NASDAQ:AMD) recently tried to breach $15.50 for the second time in five month. It has fallen 20% since its last attempt just two weeks ago. Yet AMD stock is still up nearly 100% in 12 months. So I don’t write it off as a loser.
Fundamentally, AMD is not cheap especially when you compare it to its long-time rival Intel Corporation (NASDAQ:INTC) which has a 16 trailing price-to-earnings ratio while AMD still is looking to deliver any profits. But the story for it has new elements that we expect will be fruitful in the future and therein lies the support.
That’s right. Today I am not betting on higher prices. I merely want to risk a little to bet that recent support will hold. This way I can generate income from what has already happened and with no money out-of-pocket. The only risk I bear is that I am willing to buy AMD stock at a lower price than today it is today. For that I collect a premium today and I keep all of it if price stays above my strikes through expiration.
Click to Enlarge I have faith that in today’s macroeconomic environment, all tech providers have room to prosper. We live in a world that is rapidly becoming completely dependent on technology. Yet we have but a few companies who provide the brains to drive this tech. AMD is one them so without a major management snafu, the bottom should be limited.
It’s never ideal to bet on a stock that is up 100% in 12 months, but I believe that in this case, Wall Street had it wrong. AMD should be able to grow into those expectations with time, and time is all I need to win on this trade setup.
Although the area that AMD stock is now approaching could present vulnerability, it could also offer strong support. $12.30-ish has been a recent level of contention. It served as resistance then support several times. So I expect that it will be sticky as both bulls and bears want to win it. Meaning it should provide support.
AMD Stock Trade Idea
The Bet: Sell the AMD Jan 2018 $10 naked put and collect 80 cents to open. Here I have a 75% theoretical odds that the price will indeed stay above my strike. Otherwise I lose money below $9.20.
Some may want to mitigate the risk that comes from selling naked puts. For those people, I can sell a spread instead. There the risk is limited to the risk of the spread less what I collect to open the trade.
The Alternate Bet: Sell AMD Jan 2018 $10/$8 credit put spread where I have about the same chances of success. If the trade wins the spread delivers 25% in yield. This is much better for me than to risk $12.70 here and hope for rally to profit. In either of my setups, all I need is stabilization to win with a 20% buffer to boot.
Investing in the stock market is risky, so I only bet what I can afford to lose.
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.