Much like with any company, the threats off and on the price chart of Advanced Micro Devices, Inc. (NASDAQ:AMD) are ever-present. But if you’re bullish, you can worry less about owning AMD stock with a fully-hedged collar strategy.
Let me explain.
It has been a good start to 2018 for AMD stock. Shares are up 12.35% in the first two trading sessions of the year. The price action is owed in part to general macro good tidings for the market. More importantly, a report released Wednesday found serious security risks present in the chips from rival Intel Corporation (NASDAQ:INTC).
The defect could impact Intel chips manufactured over the past decade and will require a security patch by users or risk hackers potentially accessing sensitive passwords. For its part, shares of INTC fell 3.39% as AMD stock gained 5.19% on the session.
Adding some color, executives at Intel scoffed at the idea its chips were the only ones at risk, while AMD applied pressure stating there was a “near zero” chance its chips could be affected.
What will Thursday bring about? After finding apparent comfort from a research report from Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Advanced Micro Devices may see backtracking. The latest update from researchers at Google Project Zero is less supportive to AMD as their team now believes the flaw, to some degree, could be ubiquitous with all of our beloved electronic devices and irrespective of the chip.
AMD Stock Daily Chart
In hindsight, the past year played out technically for AMD stock like clockwork. Following a massive run of about 300% in 2016, shares took a breather, albeit a volatile one, in finishing off by 9% in 2017.
Now entering 2018, AMD is off to a very good start from a fairly attractive starting position. In the year’s first two trading sessions, it has managed to rocket higher adding confirmation to an existing and potentially very bullish, high-level double bottom pattern 38% in depth and 10 months in duration.
Our view is the price action points to a meaningful bottom for intermediate-term bulls and one which will lead to an eventual bullish breakout to fresh highs for AMD stock in 2018.
The Trade on AMD Stock
For like-minded traders that wish to own AMD stock in anticipation of an emerging bullish trend in shares, but also appreciate the benefits of defined and reduced risk, a collar strategy is an attractive way to position.
Reviewing AMD’s options board and shares at $11.55, one favored combination is the Feb $14 call / $11 put collar for $11.94.
What’s the benefit of the 39-cent premium offer compared to owning AMD stock outright? The main benefit is limited risk of $1.05 or 7.8%. This is guaranteed by the purchased $11 put versus having to rely on a stop loss, the whims of the market and potentially larger-than-expected losses to exit a position if so desired.
The real cost for this bullish AMD position is the sold Feb $14 call. While the premium is used to help offset some of the cost of the $10 put, the short position does initially cap the trader’s upside potential.
Bottom-line, the collar is a compromise. But with 17% of upside and more than double the downside risk, an earnings cycle in the mix and the ability to adjust the collar to ride any future developing trends or even accumulate shares on weakness with greater risk authority — it’s a winning concession in my book.
Disclosure: Investment accounts under Christopher Tyler’s management currently own positions in AMD stock and / or AMD derivatives, but no other securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.