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Today I’m recommending a ratio put debit spread in Advanced Micro Devices, Inc. (NASDAQ:AMD), a global semiconductor company.
After a sharp decline at the start of last week, AMD attempted to stage a rally on Wednesday, but it has since given up all of those gains again. With the stock down about 23% from its recent highs, the stock has fallen into a bear market, despite the company’s advantage over the Intel Corporation (NASDAQ:INTC), one of its primary competitors.
There have been rumors that one of the drivers behind the recent decline is that a large bank, Credit Suisse, has been unloading a large position in the stock after the end of a lock-up agreement. This could have cause the quick decline we saw in the last few weeks.
On the bullish side, some analysts believe AMD is still undervalued at current levels. However, from a technical perspective, AMD shares have now run into strong resistance just under $35 per share after a six-month winning streak. It looks to me like that bullish phase is now over, as the downtrending resistance level formed by the stock’s prior peaks in 2000 and 2006 has held so far and sent AMD back down to the $26.50 level as of this week.
With that in mind, here’s the trade I’m recommending today:
Using a spread order, buy to open 1 AMD Nov. 2nd $25 put and sell to open 2 AMD Nov. 2nd $22 puts for a net debit of about $0.30.
Shares still look somewhat overbought on a monthly timeframe, and there is not a lot of strong support on the downside until $22.50 comes into play. Therefore, I’ve set my stock-based stop signal for this trade at the $22 level.
A ratio debit spread is simply a way to lower the cost of buying options, as the two option(s) that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this ratio put debit spread is a way to lower the cost of establishing a bearish put option trade. Many brokers will require the use of margin and/or a set amount of reserved capital and/or a margin account to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
