Advanced Micro Devices, Inc. (NASDAQ:AMD) just had a full meal of gains that are being digested as I type. Shareholders bummed by the past three days of churn need to have their head examined. Even rock stars like AMD stock deserve the occasional respite.
Besides, there’s a silver lining to these consolidation periods — they create low-risk trading opportunities for those not already in the fray.
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Let’s take a fresh look at AMD’s stock chart.
Advanced Micro’s meteoric ascent is displayed in all its glittering glory on the weekly chart to the right. From $2 to $14 in two short years. What a champ!
Last week’s ramp carried AMD right into overhead resistance at $14.80. This is a perfectly logical area for sellers to strike, particularly given its overbought status. The best-case scenario is to see the stock consolidate for a few weeks to establish a base for an eventual breakout above resistance.
Volume patterns have been impressive as well. Check out the three accumulation weeks with increasing participation. The urge to buy has been real.
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As shown on the daily chart, the past three days of selling has been quite benign. Consider it more of a pause in AMD stock than a pullback.
While the selling pressure may continue for a spell, there’s a buying opportunity at the end of this.
The Trade on AMD Stock
Demand for options ramped alongside Advanced Micro Devices shares last week. In fact, at 39%, AMD’s IV Rank is sitting at a two-month high. That means option premiums are ripe for the selling.
Right now I’m eyeing the Jul $12 puts. You can sell them for around 24 cents.
Given AMD’s low stock price, the margin requirement should be minimal. That means even with a small 24 cents of potential reward ($24 per contract), the potential return on investment should be north of 10% to 20%. And that’s for only three weeks of time!
In timing the entry, you could wait for the stock to trade above a prior day’s high to confirm its rebounding.
By selling the put, you are obligating yourself to buy AMD stock at an effective purchase price of $11.76. If you’re a willing buyer down there, then ride to expiration and allow assignment if the puts sit in-the-money. Otherwise, repurchase shares if they fall below $12.
As of this writing, Tyler Craig owned short calls on AMD.
