Once upon a time, Advanced Micro Devices (NASDAQ:AMD) was the life of the party. Its volatility was renowned, and its gains were the envy of the tech sector. But after April’s earnings announcement, everything changed for AMD stock. Momentum fled and fanboys with it. Today, we’re chronicling the fallout and showing which options strategies you can use to profit.
You don’t have to look hard to see why AMD became a giant in the field of momentum traders. There’s no need to squint, no need for a magnifying glass. You can spot its meteoric rise from space.
From 2018’s low of $9.04 to this year’s peak of $59.27, Advanced Micro Devices shares ballooned over 550%. The rocketship rise was fueled by the potent combination of increasing revenue and earnings. Not to mention the booming bull market in the technology sector.
Equilibrium Has Been Found
AMD suffered alongside everyone else during March’s liquidation event, but it didn’t stay down for long. Like a beach ball held deep beneath the surface, it rapidly returned to its peak. But then, the April 29 quarterly report arrived and torpedoed the stock’s momentum. Fortunately, the trajectory shift wasn’t one from up to down. Instead, it was from up to sideways. The earnings results were good enough to keep the share price aloft, but not great enough to justify a continued advance.
Equilibrium, it appears, has been found.
Traders used to a wilder AMD stock are growing bored with its new tamer disposition. Range-bound equities aren’t nearly as exciting as those that are trending to new highs week after week. They require you to either shift trading tactics or abandon them in search of more exciting opportunities elsewhere.
If you’re willing to do the former, I have an options strategy or two that will help. Before I unveil them, it’s worth pointing out that the trading range in AMD will be temporary. We’ve seen previous episodes of neutrality over the past three years. Even the most powerful growth stories see their share prices ebb and flow. Stocks that rise to the moon without any type of consolidation or pause along the way create unsustainable trends anyway.
Just look at 2019, for instance. AMD first rose to $30 in April, and after six months of sloppy trading, it was still at $30 in October. But that long-term base set the stage for the epic rally that saw the stock rise another 50% by year-end. This type of choppy action allows stocks to digest gains while time passes and earnings grow.
Trading the AMD Stock Range
Over the past three months, Advanced Micro Devices has played ping pong between $50 and $58. This week’s bounce off support reinforced the range and proved that dip buyers are still alive and well. With the stock now fiddling with the middle of its range, it’s hard to have confidence in making a directional bet. The 50-day and 20-day moving averages both loom overhead, threatening to impede further gains. And critical support near $50 lies closely below, warning off any bearish trades.
Neutrality, it seems, is the best bet here. And that suggests trades like covered calls and naked puts are worth a shot.
Trade No. 1: Buy 100 shares of stock and sell the Aug $52.50 call for around $4.05.
Because we’re selling an at-the-money call, the potential profit is limited to the call premium received. Since the overall trade cost is around $48.40, the $4.05 of profit translates into an 8.4% return in a cash account. It’s double that if you’re buying stock on margin.
If you’d prefer a cheaper trade, then sell puts.
Trade No. 2: Sell the Aug $45 put for $1.30.
Consider this a bet that AMD stock stays above $45. If it does, you’ll capture the $1.30 reward. If the put sits in-the-money at expiration, you’ll be obligated to buy 100 shares at a basis of $43.70.
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 options positions in AMD.
