The trading range in Advanced Micro Devices (NASDAQ:AMD) is now pushing into its fourth month. Stock traders tired of the indecision should shift to using options contracts. The derivatives market has a handful of cash flow strategies that have been printing money in AMD stock over the past quarter. Today we’re exploring how you can score your payday.
Consolidation spells aren’t a new phenomenon for Advanced Micro Devices. All powerful uptrends are interspersed with pausing periods. They’re healthy because they allow overbought conditions to ease and gains to be digested. Ultimately, the stairstep pattern alternating between rising and pausing creates more sustainable, robust uptrends.
In contrast, price rallies that become overly steep are prone to nasty rug-pulls that are harder to trade.
For all of these reasons, the past few months of sideways chop for AMD stock should be viewed as a welcome development. On the weekly time frame, this year’s price action has taken on the form of a cup-and-handle pattern. March’s meltdown and the subsequent “V”-shaped recovery created the cup.
And the past four months of sideways drift formed the handle. Historically, when AMD has broken out of sideways ranges like this, we’ve seen reliable upside followthrough.
AMD Stock Chart
I’ve labeled previous such breakouts in the following weekly chart.
As frustrating as the past few months of meandering might be for directional traders daydreaming about prior rallies, it is not out of character for its long-term trend. Most spectators are watching for a breach of $59.27 to signal the next advance has begun. I think it’s a logical plan, but why not try to profit right now? If you’re willing to harness the power of options contracts, you can create positions that will generate gains if AMD stock simply remains in this range.
Let’s take a closer look.
How to Cash In on AMD Stock
Drilling down to the daily time frame reveals a clearer picture of AMD’s $10-point range. Support is consistently coming in at $49, and resistance is around $59. Until we finally blast through either end, I think options trades designed to profit from time decay make sense. Given the relatively cheap price tag near $55, covered calls or naked puts are both viable choices. Given the longer-term uptrend, it’s worth noting that an upside breakout is more likely than a push lower.
Covered Calls
The covered call consists of buying 100 shares of stock and selling a call option. You’re obligating yourself to sell the stock at a set price, which limits your upside profit potential. But you get paid for the obligation. That payment or premium acts as income or cash flow. Typically we sell short-term, out-of-the-money calls that provide a higher rate of time decay and room for the stock to grow before you have to unload it.
The Trade: Buy 100 shares of AMD stock and sell the Aug $55 calls for a cost basis around $50. You’re buying the stock near $54, but receiving $4 of premium from the short call.
The max gain is $5 and will be captured if AMD sits above $55 at expiration.
Naked Puts
If you don’t want to tie up the capital required to buy 100 shares of stock, you could consider a naked put trade instead. Because I’m going to use a lower strike price than the covered call, this will have a higher probability of profit. When selling puts, you obligate yourself to buy shares of stock if assigned.
The Trade: Sell the Aug $50 put for $2.60.
You will pocket the max gain of $2.60 if AMD stock stays above $50. If it is below $50 at expiration, then you’ll purchase the stock for a basis of $47.40.
Tyler Craig is a member of the Chartered Market Technician’s Association and holds the CMT designation. His entire adult life has been dedicated to helping individuals learn how to trade as an elite instructor and personal mentor. To join his team and the best trading community on the planet, click here. At the time of this writing, Tyler held naked puts in AMD.
