Experts see great things for the tech sector in 2018, and rightfully so. We live in a world that is becoming more dependent on technology at a fast pace and it will likely become exponential soon. So there is room for all suppliers to the brains of this tech will prosper. And therein lies my opportunity in Advanced Micro Devices, Inc. (NASDAQ:AMD).
AMD is a momentum stock and it’s on the move. While I can’t guarantee how quickly it reaches its potential, I bet on its support for income.
Today’s bet is on the price action in AMD into early 2018 regardless of value.
The year started with a bang for the Nasdaq. The rally was broad with companies like Apple Inc. (NASDAQ:AAPL) and Micron Technology Inc (NASDAQ:MU) rising 1.8% and 6% respectively. I bet that unless we get a new worrisome geopolitical or macroeconomic headline, this will continue for a while.
Even then, there may be swoons. Back in July and after a beautiful rally we saw AMD stock fall 20% and then another 10% in November. Yesterday, it may have went into a breakout mode that could last. This morning we see a continuation which should hold up. Nevertheless, I will not buy the shares outright and hope for the rally.
Even though this is a bullish equity market, I still prefer to bet on support scenarios rather than upside hopium. This way I don’t have to be perfect in my entry points. Usually I bet on value stocks that are temporarily out of favor. But in AMD stock’s case there is no tangible value from a price-to-earnings basis so I bet on the sector and AMD’s stock price action.
I remember days where the headlines were concentrated around the rivalry between AMD and Intel Corporation (NASDAQ:INTC) but that is no longer the case. There are exciting newcomers like Nvidia Corporation (NASDAQ:NVDA) and new application like Bitcoin mining and AI which have revitalized interest in the sector.
It is important to note that by using AMD options, I don’t need a rally to profit as long as price holds above my support. But if one comes then my profits will materialize faster. The only caveat is that I am willing to own the shares should my thesis fail.
Earnings reports are binary events where guessing the short term reaction from traders is more gambling than investing. AMD reports its earnings late January and more often than not the reaction to those is negative. So I expect some drama around that time.
Even though it’s moving this morning, experts expect even more out of AMD stock. Their average price target is still 20% higher and a high target of $22 per share. Technically it is possible, but I want to profit without staking my money on that possibility.
The Bet: Sell AMD Apr $10 naked put and collect 60 cents to open. Here I have a 75% theoretical chance that I would retain maximum gains. But if the price falls below my strike, then I would suffer losses below $9.40.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Bet: Sell the AMD Apr $10/$9 bull put spread. Here my risk is smaller yet the spread would yield more than 20% on risk. Compare this with risking $11 per share now to buy the shares and leave no room for error.
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.