How to Trade Advanced Micro Devices into Tomorrow’s After-Market Earnings

Advanced Micro Devices (NASDAQ:AMD) is heating up ahead of tomorrow’s (Jan. 26) earnings report. Today we’re breaking down the optimism and suggesting two potential ways to play AMD stock into Tuesday’s after-market event.

Advanced Micro Devices (AMD) website, with magnifying glass over the AMD logo.
Source: Casimiro PT / Shutterstock.com

Long ago, AMD made its way onto every momentum traders’ watchlist. And though the share price has waxed and waned, it’s never misbehaved bad enough to get kicked out. The high beta, explosive upside, and consistent trending nature created a loyal following. Some would say the chip company is the ultimate breakout stock.

Sure, it’s languished in recent months, but last week’s tech sector breakout could be signaling that an awakening is nigh.

Thank You, Netflix

If you’re looking for a culprit to the newfound strength in the Nasdaq Composite index and its technology-centric constituents, I suggest casting an eye toward Netflix (NASDAQ:NFLX). Wednesday’s 16% boom following its quarterly earnings report lit a fire under the whole sector. Traders quickly bid the other tech titans higher in anticipation that they, too, would have positive responses. It looks like some good old fashioned front-running going on.

The logic is as follows. If investors are giddy enough to bid Netflix 16% higher in a single bound, then perhaps they’ll react favorably to the slew of other tech companies scheduled to release earnings.

Rather than waiting for said eventuality, speculators are bidding up the likes of Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL,GOOG), Amazon (NASDAQ:AMZN) and others in true discounting fashion. Whether the Street is reading too much into a single company’s report remains to be seen. As for me, betting with the crowd seems far easier than betting against it.

Some would say the surge was a long time coming. The Nasdaq, once the belle of the ball, has taken a backseat to small-caps of late. It was about time they received some love and capital inflows.

Market Expectations for AMD Stock Earnings

Advanced Micro Devices (AMD) stock chart with bounce of 50 MA.
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

While not quite in the same category as the aforementioned mega-caps, AMD stock is a leader among semiconductors and is a good proxy for risk appetite. Thursday’s rise (and Friday morning’s gap higher) echo the return to tech seen elsewhere in the sector. But with earnings looming this week, the ultimate question you need to consider is whether you’re willing to roll the dice ahead of the binary event.

To help in the decision making, let’s lay out what the market is pricing in.

The options board provides plenty of data about the expected move. Implied volatility for the front-week options are baking in a move of +/-$8.30. That translates into a move of 9%. Based on the past four earnings responses, that seems fair to high. In other words, I’d rather be a premium seller than buyer here.

If we combine that with the longer-term uptrend, then a strategy like naked puts or bull put spreads starts to look interesting.

The Trade

I like the idea of selling puts near the rising 200-day moving average. Currently, it’s nestled near $73.50. With AMD stock pushing toward the century mark, I’m favoring a spread over naked options. It will keep the margin requirement within reason and thus boost the potential return on investment.

If you want a more aggressive trade, then stick with February options. Otherwise, use March. Here are the strikes I prefer for each.

  • Bull Put One: Sell the Feb $77.50/$72.50 put vertical for 55 cents.
  • Bull Put Two: Sell the March $72.50/$67.50 put vertical for 55 cents.

Then, get comfortable and listen in on Tuesday’s call webcast at 5 p.m. EST. It usually makes for a highly informative session.

On the date of publication, Tyler Craig held a LONG position in AMD.

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