I have always said that the short-term reaction to earnings reports has very little to do with the quality of the results. We often see great reports met with severe selling and vise versa. Last night Advanced Micro Devices, Inc. (NASDAQ:AMD) fell 6% on the knee-jerk reaction to earnings and now it’s up 2%, leaving a candle that spans two weeks worth of price action range.
Today I ignore the short-term noise and trade the technical potential inside sustainable fundamentals. The macroeconomic conditions in the U.S. is on track and the tax law changes just made them better. So whatever was working until now will continue to work short of a black swan event.
So first the fundamentals. I usually like to go long value, but in this case AMD stock is not cheap. So I will be trading off the price action and chart patterns. In any case, valuation in the sector is not consistant among the major competitors. Intel Corporation (NASDAQ:INTC) is cheap while the poster child of it, Nvidia Corporation (NASDAQ:NVDA), is not. All are moving higher.
This is not a complete gamble because there is an underlying thesis of demand. We are becoming more dependent on technology than ever. AMD is one of few suppliers of said tech, so the profitability will follow. For now, the whole sector should prosper.
Last night, management delivered on promises and raised guidance even though the statement there was somewhat confusing at first. They also said that blockchain was one third of the growth. This, while it sounds encouraging, worries me a bit. If a lot of this was crypto-related growth then onus is on the bulls to prove its sustainability. This is especially true now that authorities seem to be targeting the legality of crypto trading.
The bottom line is that there was nothing worrisome in this report and therein lies my opportunity.
Click to Enlarge The chart shows that a mega spike is coming and I want to be long AMD. The weekly chart shows the channel and the monthly chart shows the upside potential. I know that we’ve had a couple of red market days. I bet that those will turn out to be good long entry opportunities. So, as long as markets don’t correct hard, I bet that AMD stock will hold recent support and use it as spring board for that leg higher.
I will mitigate my risk by reducing my out-of-pocket expense. So even the rally fades I can still profit. No, it isn’t magic. I simply use AMD options to accomplish my set up. I sell downside risk against what others fear to raise funds. I then use those funds to go long the stock. Essentially I would be long AMD stock for free as long as price stays above my support.
AMD Stock Trade Idea
The Bet: Buy the AMD Feb/Apr $15 call calendar. I buy the Apr $15 call and I sell the Feb $15 call against it. This is a net debit of 20 cents which would be my maximum loss. Ideally I need the price to rise towards $15 through mid February letting those calls expire worthless in my favor. Then I would be left long the April calls for a discount.
To mitigate my risk, I will selling downside risk to offset my out-of-pocket expense.
The Bank (Optional): Sell the AMD Jul $10 put and collect 40 cents to open. Taking both set ups would results in a net credit. So as long as price holds above $10 I am a winner regardless. And any premium I recover from selling the call setup would be incremental profits.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
