Many tech stocks have been under a good deal of pressure thanks in large part to trade war with China. But in the battle between bulls and bears on the price chart, an options-based pairs trade pitting Advanced Micro Devices, Inc. (NASDAQ:AMD) against Nvidia Corporation (NASDAQ:NVDA) looks like a smarter way for investors to play their own trump card. Let me explain.
Everybody at this point knows about the Donald Trump Administration’s trade war with China. And the semiconductors are one group that have a good deal of risk tied to today’s and tomorrow’s political agenda. But with policies that may or may not have the impact feared by Wall Street, a better way to play these two tech stocks is for investors to use the options market.
Charts and other speculations are a part of trading of course. But for bulls and bears who wish to gain a stronger advantage in tech stocks AMD and NVDA, options can offer risk-adjusted returns that are simply unavailable to their stock toting peers. Call it your very own trump card.
So without further ado, let’s take a look at the technical picture of both Advanced Micro Devices and Nvidia, form an opinion and offer up a couple limited- and reduced-risk strategies.
AMD Monthly Chart
On the price chart, AMD is notoriously volatile, but continuing to favor bulls after breaking out last week. The provided monthly view of this tech stock shows AMD has just cleared a slightly odd, high-level double-bottom base pattern nearly 1.5-years in-the-making.
The 38% Fibonacci resistance level dating back to 2006’s intermediate high is the next potential challenge for bulls. However, given the length of the consolidation and supportive stochastics set-up, AMD looks ready for its next leg higher and in general, more favorable price volatility going forward.
Reviewing the options market for AMD, I’m a fan right now of buying the Oct $18/$22 call spread. With shares at $16.36, this vertical is priced for 80 cents.
The positioning demands AMD rally to fresh relative highs by expiration in order to breakeven or let alone profit. However, given more than three months on the calendar and a potential earnings catalyst in late July, there’s certainly support for that type of move.
Further, with a max gain of $3.20 and the flexibility to adjust into other limited-risk spreads such as a modified fence or an attractively-priced butterfly combination at a later date; this vertical is a nice starter position on this tech stock.
NVDA Monthly Chart
I’m not going to badmouth NVDA and try and call “the top.” But in looking at the provided weekly view, this tech stock is at risk of a larger correction if history rhymes.
The fact is, Nvidia’s recent low near $233 fell short of recent pullbacks in the high teens. And now, a rebound sets shares up as a bear flag against the 50-day simple moving average while the weekly stochastics looks decidedly unsupportive of higher prices.
NVDA Stock Options Play
I’ll be the first to admit, a recent play on NVDA hasn’t worked out based on much of the logic outlined above. But I still like the idea of using a below-market long put butterfly as a way to position for a larger correction, while being open to buying shares at aggressively lower levels for a small premium to the market.
After reviewing the options board for this tech stock, the Aug $235/$220/$205 put butterfly for $1.80 with NVDA at $247.33 is favored. If it looks familiar, it is as the strikes are the same as in our prior analysis from late June. This time though, August looks appropriate as the contract participates in Nvidia’s next earnings event — and a possible opportunity for today’s bear that could be persuaded to turn bullish for the right price.
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.
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