Advanced Micro Devices, Inc. (NASDAQ:AMD) shares are in free fall today following negative comments from Goldman Sachs analyst Toshiya Hari.
![Profit From the Plunge in Advanced Micro Devices, Inc. (AMD) Stock!](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
The investment bank initiated coverage on AMD stock with a “sell” rating due to its lofty share price. Cries of “abandon ship” were heard echoing through the Street as the massively popular chip stock fell 8%.
Let’s survey the damage inflicted and whether opportunity lurks amid the wreckage.
AMD Stock Is Down, But Not Out
Today’s downdraft was sufficient in breaking multiple support levels. Previous pullbacks were halted dead in their tracks at the $13.25 zone, but not this time. AMD stock sliced through this support zone like a hot knife through butter. What’s more, the 50-day moving average gave way for the first time this year.
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Trend traders treat the 50-day moving average as a proxy for the intermediate-price trend. And since the strongest trending stocks remain above this smoothing mechanism, a close below it signals to spectators that Advanced Micro Devices has lost its mojo, at least for now.
The next significant support level to watch is $12.50. If buyers don’t defend their turf, then $11 becomes a real possibility. Incidentally, $11 was the price target selected by Toshiya Hari alongside the sell rating.
But perhaps we’re getting a bit ahead of ourselves. These are, after all, simply potential support zones that could come into play if sellers press their advantage in the weeks to come.
Fade the Fear with AMD Options
Trying to predict whether today’s downdraft is a one-off, or the beginning of a multi-week correction is tough. But you know what’s not tough? Using the drop (and concurrent pop in implied volatility) as an opportunity to sell out-of-the-money AMD put options.
Consider it a way to get paid for your willingness to buy AMD stock at a steep discount to today’s price. For every put contract sold, you obligate yourself to buy 100 shares of stock at the strike price.
For example, you could sell the May $10 put for 20 cents. Provided the stock sits above $10 at expiration, the put will expire worthless allowing you to pocket the premium received. While 20 cents may not sound like a lot (it’s actually $20 per contract), the margin requirement for the trade is so small (about $100) that your return on investment is still incredibly attractive. And $20 on $100 is an impressive 20% return on capital.
Now, sure, your margin requirement will increase if AMD shares fall further. And, yes, there is an earning announcement coming before May expiration. But so what? To reach $10, Advanced Micro Devices would have to fall another 23% from here.
That’s a pretty wide profit range.
The ultimate question is when to pull the trigger. I suggest waiting for some signs that AMD is rebounding in the days ahead. If today’s drop continues, you’ll have an opportunity to sell the May $10 puts for an even better price than 20 cents.
At the time of this writing, Tyler Craig held no positions in any of the aforementioned securities.