Time To Cash Out Your Chips on AMD Stock

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AMD Stock - Time To Cash Out Your Chips on AMD Stock

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Shares of Advanced Micro Devices (NASDAQ: AMD) have certainly been on a major bull run in 2018. AMD stock is now up over 200% year to date, far outpacing gains for tech stocks generally.  While the new second generation Ryzen high-end chips have been well received, the stock gains are beginning to far outpace any semblance of sanity. Look for the red-hot rally in AMD to stall out near current levels.

Advanced Micro is certainly no bargain on either an actual or comparative valuation basis. AMD stock now is trading with a P/E multiple north of 100 (105.50 as of this writing). This is more than double the 5-year average of 50.4. Price-to-sales is now well over 5, compared to just 1 over the same time frame historically. Valuations are largely ignored in momentum driven stocks until the stock rally slows as valuations reach ridiculous levels. AMD stock is likely getting close to that inflection point.

AMD stock is getting overbought from a technical perspective. MACD is at the highest level over the past six months and beginning to weaken. The 9-day RSI is also at a similar extreme reading over 75.  Advanced Micro shares are trading at a big premium to the 50 day moving average of $21.15. Shares are up an astounding 65% just in the September option expiration cycle that began August 20.


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Most importantly, the parabolic upside run in AMD stock is finally showing signs of slowing. Last Thursday saw a reversal day with shares trading to new highs at $34.14 only to sell off sharply and close near the lows of the day. Friday saw Advanced Micro fail to get past the prior day’s opening price. This type of price action is many times an indication that the buyers may finally be exhausted.

Implied volatiltiy (IV) in AMD options is at the highest level since the rally began, meaning option prices are very expensive. This favors option selling strategies when constructing trades.  Earnings are likely due October 23 with the traditional monthly options expiring October 19 the best choice to avoid earnings risk.

So to position for a stall out in AMD stock, a bearish call credit spread makes sense.

AMD Stock Trade Idea

Buy AMD Oct $41 calls and sell AMD Oct $39 calls for a 25 cents net credit.

Maximum gain on the trade is $25 per spread with maximum risk of $175 per spread. Return on risk is 14.28%. The short $39 strike price provides a 19% upside cushion to the $32.72 closing price of AMD stock.

Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/time-to-cash-out-your-chips-on-amd-stock/.

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