It’s a case of tough love for Advanced Micro Devices (NASDAQ:AMD) shares right now. But if you’re willing to look past today’s bear market warnings and a more bullish, albeit potentially volatile big picture, then a creative spread combination looks like the right option to play.
Let me explain.
To say AMD stock had a tough session Wednesday, may be the understatement of the year. Shares of Advanced Micro spiraled lower by 8.22% on more than 147 million shares. But if misery loves company, AMD also wasn’t alone.
The “clueless” and widespread panic, which took AMD along for the ride was punctuated by the Dow Jones’ sensationalist but still dizzying 832 point decline. The price route was triggered with nary a single fresh catalyst. But let’s face it, it also wasn’t without existing ammo for bears to take a swipe at market bulls with.
So where do we go from here in AMD stock? As the S&P 500’s top performing stock of 2018 and virtually its entire 143% year-to-date gains coming in less than six months, it has also made AMD stock one of the most talked about and unequivocally, most actively traded growth stocks in the market.
Bearing in mind AMD stock’s position within the market — one which also has a legion of bears and short interest in excess of 20% — Wednesday’s volatile price swoon in AMD stock is simply the nasty byproduct of momentum turning into its own worst enemy and bears flaunting a victory within a losing battle.
The pressured price action Advanced Micro Devices is currently feeling is nothing new. The fact is the greatest growth stocks from Netflix (NASDAQ:NFLX) to Amazon (NASDAQ:AMZN) or even Tesla Motors (NASDAQ:TSLA) have had their share of divisive critics and taken lumps at times before soaring to even higher highs.
So, if you’re like me and believe in the longer-term narrative and proven stewardship of Advanced Micro Devices under Lisa Su, then it’s time to buy, buy, buy … well sorta.
AMD Stock Monthly Chart
It’s official. As of Wednesday’s close, AMD stock is in bear territory. It sounds scary enough. And by the looks of it, a monthly chart sporting a potentially ominous candlestick topping pattern only reinforces a situation that doesn’t appear forgiving to today’s would-be bulls. Still, there is good news to be found.
Shares of Advanced Micro Devices are now off 27% from their recent high. As investors familiar with growth stocks are or should be aware, this type of corrective action is par for the course. And what that ultimately means is the current situation is typically closer to being a better opportunity to buy growth at a discount than concerning oneself within a minor setback and temporary bear market label.
AMD Stock Bullish Spread Combination
Despite being bullish on AMD’s long-term prospects and given a correction of this size, it is likely within 5% to 10% of finding a meaningful bottom. I’m not a glutton for punishment and don’t enjoy buying stocks blindly or as a standalone position. Having said that, a limited and reduced risk options position to gain bullish exposure in Advanced Micro Devices makes sense.
Reviewing Advanced Micro Devices options and shares at $25, I’m favoring a combination which purchases the asymmetrical Jan $27 / $32 / $34 call butterfly and sells the Jan $23 / $21 put spread for a debit of 35 cents.
Downside exposure is contained to $2.35 or 9.4% of owning AMD stock with this offbeat spread package. That’s nice protection in a volatile name. Even better, the break-even at expiration is $23.35.
That’s 6.6% below current levels. Furthermore, the maximum risk is 16% beneath today’s $25 price in AMD and would require a slightly larger-than-normal corrective move of 38%. In our view, having a paper loss at those levels in AMD stock is where traders should be greedy, not fearful and would be a good spot to begin building a longer-term position in shares.
On the upside, if AMD is able to regain its footing from today’s corrective activity, i.e., bear market, on an expiration basis, then the play begins to profit above $27.35. That’s just under 10% from Wednesday’s close. But if shares rally sooner, this modified butterfly will quickly balloon in value due to its asymmetrical configuration.
In a perfect world, AMD stock will rally to $32 on the third Friday of January and allow profits to approach $4.65 or a return in excess of 1,300%. But unlike a traditional long butterfly this position retains $2.65 above $34, just in case cooler, but more aggressive heads prevail in this secular growth story.
Disclosure: 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.