Advanced Micro Devices (NASDAQ:AMD) is a momentum stock for the ages. For its qualifications, look no further than the meteoric rise of the past five months. Since carving out a low of $9.04 on April 4, AMD stock has risen an astronomic 254%. While still a far cry from the insanity of Tilray (NASDAQ:TLRY) stock’s rocket ship ride, Advanced Micro Devices deserves your attention.
Bulls hit the pause button on their buying binge this week, but I’ve been mightily impressed with how well the high flier has held up. You would think, given its massive gains and overbought status, that profit-takers would be aggressively ringing the register. But they haven’t been.
Such behavior should embolden shareholders because it signals that buying pressure is still bubbling beneath the surface.
The stock is sitting well above all major moving averages. Ever since the rally began in earnest following the July earnings release, pullbacks have been shallow and short-lived.
I found the Sept. 13 distribution day somewhat concerning, but those worries largely dissipated when AMD stock roared back the very next day.
Throw it all together, and I think the stock is still worth trading to the long side. To take advantage of the high implied volatility rank (56%), I suggest selling puts.
AMD Stock Options Trade
The short put offers a high probability route for dipping your toes into the water. Instead of buying shares outright, we can obligate ourselves to buy at a steep discount. For example, with AMD trading near $31, we can sell the Oct $25 puts for around 42 cents. Think of it this way — we’re promising to either buy the stock at $24.58 ($25-42 cents) or keep the 42 cents.
If the stock tanks by expiration and sits beneath $25, then we’ll have to buy it at what amounts to a 20% discount to the current share price. But if it doesn’t tank, then we will capture the 42-cent premium.
The initial margin requirement should only be around $250, so the return on investment is an attractive 17%. Here’s one more stat for you to chew on. The market is pricing in an 88% chance that AMD will be above $25 at expiration. Consider that your probability of profit.
As of this writing, Tyler Craig held neutral options positions. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
