The PHLX Semiconductor (INDEXNASDAQ:SOX) exchange-traded fund is up 45% in a year, which is astonishing. What’s even more amazing is that Advanced Micro Devices, Inc. (NASDAQ:AMD) stock is up over 110% for the same period. However, year-to-date, AMD stock is lagging the SOX a bit.
The sector still has room to go inside this bull market. So AMD could play catch up with another leg higher. Earnings are coming soon and they could serve as the perfect catalyst.
No, I am not buying the stock today and hoping that traders buy the stock on the results. The short-term investor reaction to earnings is more gambling than investing. We never how they will perceive the report regardless of its quality.
So I will rely on proven support to profit for the next few months.
Above $14.50-per-share, Advanced Micro has had strong resistance. Similarly and below $12.50, it has been finding support. Instead of buying the shares outright and without any room for error, I expect prices to rally, and I will sell downside risk below said support.
If I am wrong, then I could end up owning the shares at a severe discount from here. So even in this bad scenario, the consequences would not be such a disaster.
Fundamentally, AMD stock is not cheap. It runs red and its price-to-book ratio is over 30X. Compare this with Intel Corporation (NASDAQ:INTC), which has a price-to-earnings ratio of 15X and a P/B of 2.5X. Even the high-flying Nvidia Corporation (NASDAQ:NVDA) only sells at a P/E of 56X and p?B of 20X.
Technically, Advanced Micro Devices stock is resting from a recent 15% rally off the September dip. Earnings will likely decide the direction of the 10% move.
I expect it to continue challenging the $15.50 and $12.50 stubborn zones until one of them breaks, then AMD stock will overshoot in that direction. My bet is that the bottom will hold and therein lies my opportunity.
Bottom Line on AMD Stock
Although I am optimistic that Advanced Micro Devices bulls will prevail, I am more certain of the support at this time. After earnings come out, I can add to my position. Meanwhile, I will sell puts to create income out of thin air.
This uber-bullish stock market still has legs. The SOX could have another 10% in it with the current macro economic conditions. So AMD also should have clear sailing for six months.
The Trade: Sell the AMD Apr 2018 $12 naked put for $1. Here, I have an 80% theoretical chance that the price will stay above my strike, so I can retain maximum gains. Otherwise, I own the shares and would amass losses below $11.
To mitigate some of the risk of selling naked puts, I could can sell a spread instead.
The Alternate Trade: Sell the AMD Apr 2018 $12/$10 bull put spread, which for the same odds can deliver 30% in yield on risk. In neither setup do I need a rally to win.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.