Semiconductor stocks have fallen out of favor. Whether it’s a new trend or merely a bump in what has been a long and bullish road remains to be seen. And perhaps no semi stock has suffered more in recent months than Advanced Micro Devices, Inc. (NASDAQ:AMD). Indeed, AMD stock has now fallen 35% from its highs.
But with the stock well into oversold conditions and support looming large, now is the time for bottom fishers to strike. And using the options market, these bargain hunters can be clever in the way they cast their lines.
The weekly chart highlights AMD’s recent rise to glory and subsequent sloppy range nicely. It’s easy to forget that its meteoric ascent began at a lowly $2 just last year. For pretty much the entirety of 2017, Advanced Micro Devices has found itself locked in a broad sideways trend between $15 and $10. It’s a monster range to be sure, but it has key support and resistance to define its behavior.
Poor earnings coupled with the semiconductor industry suffering widespread profit-taking has taken AMD stock out at the knees. But for all its fury, the downturn has only returned the stock to the lower-end of its range. With potential support looming close, now is as good a time as any for buyers to strike.
Note how the stochastic indicator is flashing an oversold signal. This is the deepest it has traveled in the past two years. And with the longer-term trend still overall pointing higher, I think bulls deserve the benefit of the doubt here.
The small price tag of the stock translates into very cheap margin requirements for selling puts. And that means we can generate a high return on investment.
If you’re willing to bet AMD sits above $9 six weeks from now, then sell the Jan $9 puts for 22 cents. The potential profit is limited to the 22 cents. While that may not sound like a lot, the initial cost of the trade is approximately $90 in a margin account. That translates into a potential 24% return on investment, which is a barn burner for this type of strategy.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.