Advanced Micro Devices (NASDAQ:AMD) has had a difficult few weeks. But it’s dip is not caused by the same yield-panic ruling the rest of the market. The difference is AMD stock was correcting off of a long rally. Even now, and after a 23% correction in the last few weeks, AMD stock is still up 148% year-to-date. Compare that to the Nasdaq Invesco Trust (NASDAQ:QQQ) up only 13% for the same period.
Luckily, I did see the AMD stock correction coming and I did profit from it with a bearish bet. But this morning the stock hit my bearish target that I had for it when it had too much love. Even stocks like Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC) were selling off this morning. And there in lies the opportunity.
No, I will not risk $26 to buy the shares of AMD out right without any protection. Instead I use options where I can define my risk to capture the upside opportunity.
AMD earnings are coming soon so I want to be long the stock coming into the event. If the stock market in general stabilizes, then AMD may have enough buyers to cause a rally leading up to the earnings announcement.
However, I do not want to own the stock outright into the earnings of AMD. I believe there is too much love for the stock and the likelihood of disappointment is high. But that is a decision I make closer to that date.
Usually I make my upside bullish bets with a pair trade. One to capture the outside move. And the second to generate income from selling downside risk into support. However in this case I will start with the call side but will not deploy the put side just yet.
Fundamentally, AMD stock is not cheap. The rally on Wall Street has been based on the perception that management is setting up for a stronger showing than it had been in the past. Consensus on Wall Street is that management has set it on the path to brilliant success.
I’m not as convinced yet so I need proof before having more conviction in downside support especially when markets in general are on shaky grounds.
Technically, AMD could catch a bid if it breaks above $27.75 per share. But there is also risk below $26. It could invite sellers all the way down to 24. While this is not a forecast, it is a scenario of which I need to be aware.
Wall Street is also optimistic on the stock. While they are mostly on HOLD, AMD is now trading well below their price targets.
The bet: Buy AMD Nov 23rd $29 call for $2.18 which is my maximum risk. I need a rally to profit in the next few weeks.
To lower my out-of-pocket expense I will sell a shorter dated call against it.
The temporary hedge: Sell AMD Oct $29 call and collect 20 cents per contract.
Ideally I want AMD stock to rise but allow the Oct calls to expire for zero in my favor thereby leaving me long the Nov call for a small discount.
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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.