Advanced Micro Devices, Inc. (NASDAQ:AMD) has developed a bad habit of correcting hard after earnings reports in 2017. AMD stock is now trading 20% below its October highs as investors rejected this most recent earnings report.
Amazingly enough and even after this dip, AMD stock is still relatively flat year-to-date and up 29% over 12 months.
Trading momentum stocks like this one is tricky. Stocks like AMD rise and fall so fast that they scare most investors out for fear of being too early or late into the trade.
That’s why I use use options to trade momentum plays like AMD stock. This way, I can build buffers and reduce the need to be surgically accurate with my entry and exit points.
What to Focus on With AMD Stock
The zone around $11.25-per-share is technically important for AMD. It was a breakout opportunity area that led to $15 prices. Now it needs to hold as support so that the bulls can maintain the momentum. In 2016, the $8-per-share line played a similar role.
In the short-term, there is risk to retest the $10-per-share level, but these are hotly-contested levels and neither side will give them up without a fight. Today’s setup is bullish, but not one that needs a rally to profit. If a rally comes, it would greatly benefit me, but all I need is for AMD stock to hold above my risk level and I win.
Click to EnlargeAMD is now trading 20% below what the average price from experts on Wall Street. So, in theory, it should have room to rally.
Fundamentally, there is every reason to believe that tech stocks should flourish in the coming years. We are now more dependent on tech than ever. And this is accelerating at an exponential rate. AMD is one of the few who supply the brains to these machines so there will be enough room for all to prosper.
Having said that, AMD stock is not cheap as I fail to see relative value. Its long-time rival Intel Corporation (NASDAQ:INTC) sells at a price-to-book of 3.2, where AMD’s ratio is 25.6. Traders are paying a big premium for Advanced Micro Devices. In the absence of relative value, this forces me to sell risk against the price action and trader behavior.
The Bet: Sell AMD Jan 2018 $10 put naked and collect 25 cents. This is a bullish bet that has an 80% chance of success. But beware. If the price falls below my strike here, I must own the shares and would suffer losses below $9.75-per-share.
Selling naked puts carries big risk. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the AMD Jan 2018 $10/$9, where the risk is limited yet the spread would yield 15% if it wins.
I could make this trade pay me more in rewards by going out to April contracts, but the risk of living through another earnings report sounds like a bad idea. 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.