Beware of Advanced Micro Devices, Inc. as Rumors Drive Volatility Higher

AMD stock has been driven higher lately, in part, by takeover and new product rumors

By Joseph Hargett, InvestorPlace Contributor

I have been bullish on Advanced Micro Devices, Inc. (NASDAQ:AMD) for quite a while. The company is eating into Intel Corporation’s (NASDAQ:INTC) market share in both the desktop and server markets. AMD also has excellent prospects in artificial intelligent and other red-hot markets.

But AMD stock is also often a target for heavy speculation. The cryptocurrency market immediately comes to mind. I’m a long-term AMD bull when it comes to the company’s core products, but speculation makes the shares extremely choppy over short-term periods.

Such is the case with AMD stock’s recent surge higher. There has been a broad rally in the semiconductor sector in the past week, and Advanced Micro Devices stock has benefitted accordingly. However, this week has also seen heavy options speculation on AMD stock — most notably, serious put buying and selling at the March and April $10, $11 and $12 strikes.

As they say, where there’s smoke, there’s fire. Rumors began circulating yesterday morning in trading circles that Advanced Micro Devices could be a takeover target. Additionally, impressive benchmarks for a rumored second-generation Ryzen chipset emerged on a South Korean tech blog recently.

While some of AMD stock’s recent rally is merit based through the rise in the rest of the semiconductor sector, these rumors raise concerns. If enthusiasm surrounding AMD shares is rumor driven, it creates weakness and downside risk.

If they do contain some shred of truth, then there is considerable upside available for AMD stock. A more impressive Ryzen chipset could spark a round of upgrades from analysts. And there is plenty of room, with Thomson/First Call reporting that only 11 of the 31 analysts following AMD stock rate it a “buy” or better.

Shorts could also be squeezed. In the most recent reporting period, 20% of AMD’s total float was sold short, providing ample fuel for a squeeze play to drive the stock higher.

There is also little in the way of hedging from these shorts. AMD stock’s April put/call open interest ratio rests at 2, with puts doubling calls among back-month options. That said, this week’s options activity on AMD suggests many of these puts were sold to open as put sell positions, lessening their bearish implications.

AMD stock
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But volatility is quite high on AMD stock right now. April implieds are pricing in a move of about 15% ahead of expiration — a level rarely seen outside of earnings. As a result, the upper bound comes in at $14.40 and the lower at $10.60.

Technically, AMD stock is facing stiff resistance from it’s 200-day moving average and the $13 level. Support is airy at best, and arrives near $11 for the short-term and $10 on a full-blown selloff.

Trading Strategy for AMD Stock

Straddle: With rumors at least partially responsible for AMD stock’s recent rally and volatility, taking a firm bullish or bearish stance is a risky proposition. One way to take advantage of this volatility, and benefit from either a confirmation or denial of the rumors is to enter an AMD straddle.

A straddle involves the simultaneous purchase of an at-the-money call and an at-the-money put in an attempt to take advantage of a greater-than-expected move from the underlying stock.  At last check, the April $13 straddle was offered at $2.44, or $244 per pair of contracts. Breakeven for this trade lies at $15.44 on the upside and at $10.56 on the downside.

You’ll note that this trade is more weighted to the downside, as I don’t expect these rumors to pan out. If you want to bullishly align your straddle, consider placing it at the April $12 strike.

For instance, the April $12 straddle was last offered at $2.32, or $232 per pair of contracts. This moves the upside breakeven down to $14.32 and the downside breakeven down to $9.86.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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