Advanced Micro Devices, Inc. (AMD) reported earnings last night and the stock is soaring on the headline. Management delivered a strong beat with no asterisks. Investors were nervous about a slowdown in Crypto-mining but there were no signs of that. The bears are in retreat.
This report and reaction came at an opportune time. AMD stock has been battered not only by the February market-wide swoon but also from recent negative headlines specific to its own operation. Most shocking to me was the Susquehanna downgrade to negative outlook and cut the price target to $7.50.
AMD is not cheap from the traditional price-to-earnings perspective but it has a legacy and that has value. In this age where mega-cap corporations are awash with cash, a proven company like AMD will not go to waste. If it gets cheap enough someone will buy it. Sure this is not a reason to buy the stock but it proves a point that value is not always in dollars and cents.
Technically, this rally towards above $10.50 should invite momentum buyers for at least another $1 where it has a recent zone of consolidation. But this is also would be a pivot point that dates back decades and is best evident on the monthly chart. So additional upside from $11.50 per share may be a tougher slog than the overnight spike but momentum may carry it through.
Although I expect more upside in AMD stock, I am more certain that the $7.50 price target is wrong and therein lies my “bet.”
I will sell downside risk into Susquehanna’s fears. I accomplish this using AMD options which could generate income with no out of pocket risk. If I am wrong then I own AMD shares at big from here. Under my current bullish macroeconomic outlook, I am confident that it wouldn’t be a financial debacle.
Last night’s report tells me that nothing has changed since January for AMD. So most of the selling during the past two months was undue. The earnings pop is trying to erase as much of that as possible.
There is another opportunity in AMD and it’s in the Analyst expectations. The overwhelming opinion is that AMD is a HOLD. This in addition to questionable price target cut headline reduce the odds of a surprise downgrade.
In fact, this greatly elevates the chances of upgrade if the rally persists for a few days. This reminds me of a similar headline for Micron Technology Inc (NASDAQ:MU) where I also profited from a similar strategy.
The Bet: Sell AMD Jan 2019 $8 put and collect 45 cents per contract to open. I have a 75% theoretical certainty so that I retain maximum gains. Otherwise, I will accumulate losses below $7.55.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Bet: Sell the AMD Jan 2019 $8/$7 credit put spread where my risk is limited. Yet if the spread wins would deliver 20% in yield.
There are no guarantees when investing in stocks, so I never risk more than I can afford to lose.
Learn how to generate income from options 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.
