How to Profit From Advanced Micro Devices Amid Dwindling Momentum

The Invesco QQQ ETF (NASDAQ:QQQ) is within striking distance of its record high, well before the other major indexes. But some of the players that led the tech stock snapback have lost steam lately. Advanced Micro Device (NASDAQ:AMD) is one of them. AMD stock returned to its previous peak as early as mid-April, but it has been stuck in the mud ever since.

How to Profit From AMD Stock as Its Momentum Starts to Dwindle
Source: Sundry Photography /

Today we’re going to look at how you can use options to profit even if the chip darling continues to dither.

Semiconductors Be Sizzlin’

To provide context, as well as determine how AMD stock stacks up against its sector, let’s begin with a brief analysis of the Vaneck Vectors Semiconductor ETF (NYSEARCA:SMH). The fund counts companies like Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA) and Qualcomm (NASDAQ:QCOM) among its top holdings. AMD stock carries a smaller weighting in the fund but still lands in the top ten.

Source: The thinkorswim® platform from TD Ameritrade

We’ve seen a consistent recovery in SMH alongside the rest of the market since mid-March. Although the uptrend’s pace has slowed, its trajectory remains firmly fixed higher. Despite a few pausing periods, we haven’t seen a lower swing low form for the past two months. The fund notched a higher swing high in May and has built a high and tight base just under key resistance at $141.

If it can break higher, the unfilled gap from February should fill by sucking SMH up to $145 in short order. The last three high volume sessions occurred during up days, so participation levels are weighing in favor of buyers. It doesn’t hurt that the rest of the market is incredibly strong as well.

AMD Stock Chart

While SMH, and QQQ for that matter, are basing near their recovery highs, AMD stock has slowly drifted lower since peaking mid-April. Along the way, it has broken below the 20-day moving average, officially turning the short-term trend from up to sideways. Fortunately, buyers have staved off a more significant trend reversal by defending the one attempt we’ve seen to breach the 50-day. That means the intermediate trend is still firmly in the bulls’ hands, as is the long-term trend (see the rising 200-day).

The accompanying chart includes a RelativeStrength reading in the lower panel to measure the relative performance of AMD’s stock versus SMH. When the line is rising, AMD is outperforming. And when the line is falling, the stock is underperforming. Up until April, AMD stock was a leader, delivering sector-beating returns. Since then, the shares have soured, and the shares now find themselves as laggards.

Source: The thinkorswim® platform from TD Ameritrade

The underperformance is one reason why I’m not in love with aggressive directional trades here. It doesn’t seem smart, given the lack of firepower. Not to mention, there are stronger semis that are probably more appropriate (like NVDA). But what I can get behind is a mildly bullish strategy that generates a profit even if AMD stock continues to drift.

Enter Covered Calls

Naked puts or covered calls will do the trick. They are equivalent positions so you can take your pick, but I’m going to suggest buying shares and selling out-of-the-money calls to create a higher potential reward.

The Trade: Buy 100 shares of AMD and sell the July $55 calls for around $3.10.

If you buy the stock near $53.50 while receiving $3.10 from the call, your cost basis will be $50.40. That’s also your max risk. By selling the call, you obligate yourself to sell the stock at $55. In other words, you’re getting paid $3.10 per share for a promise that you’ll sell your shares.

Since your effective purchase price is $50.40, your max upside is $4.60, or 9%. It’s double that if you’re buying stock on margin. That’s not bad for a higher probability play like this. If the stock doesn’t push past $55, then you’ll simply pocket the $3.10 premium and take comfort in the fact that you scored a tidy 6% return for some six weeks.

For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler held bullish positions in AMD.

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