There are bulls and there are bears when it comes to Advanced Micro Devices, Inc. (NASDAQ:AMD). Yet despite an increasing preponderance of the latter, AMD stock is shaping up on the price chart and for a bullish collar spread in front of earnings in two weeks. Let me explain.
To be a trader. The occupation or preoccupation invokes swashbuckling imagery of investors battling, as well as trying to outwit and take advantage of other investors seeking to do the same thing in a stock like AMD. Can’t we all just be friends?
The answer to that is ‘not a chance.’ My own biased hope is AMD stock’s nay-saying and increasingly bearish short interest continues to take it on the chin. The fact is since announcing its latest enterprise GPU for the market, conditions look more and more promising off and on the price chart for the semiconductor outfit and turnaround play.
Bottom-line, I’m keeping the faith as AMD moves ever closer to the next earnings confessional on October 24. But while I might be optimistic, hedging the bullish outlook with Advanced Micro Devices’ options to avoid getting unnecessarily roughed up is my only unwavering position at all times.
AMD Stock Daily Chart
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Yesterday in an unrelated article I quipped ‘there’s always a line somewhere.’ Looking at the AMD daily chart and I’m reminded of that eternal truth. In this instance and just over one month ago I wrote about my technical concern for Advanced Micro Devices shares.
AMD had fallen for a handful of days within what appeared to be a bear flag pattern which developed after shares broke up-channel support formed off of the stock’s 35% corrective low from the late February high. That’s worrisome, right?
Backing our unease, shares of AMD had also retreated back below the 50% retracement level of its corrective base as the 50-day simple moving average acted as resistance and held our spied bear flag in check. All things considered, the situation didn’t look good technically for bulls near-term.
Much to the satisfaction of my own longer-term hedged position, AMD failed to comply with the moderately bearish outlook. The anticipated breakdown of flag support never occurred and over the past month shares have managed to build another uptrend within a fairly large corrective base that’s now in its seventh month.
So what happened? The technical hold of the bear flag may have to do with the 62% retracement level or ‘line’ based on the May to late July uptrend. At the time I can state the Fibonacci level was overlooked. And in hindsight it has acted as support while maybe solidifying our playful point about charts. As I’ve said, there’s always a line somewhere.
So what’s next for AMD? I’m still a bull longer-term. Now and shorter-term shares are confirming this view by trending higher. Given all the base work that’s been performed, without too much effort a breakout to new intermediate highs could be on the horizon. I’ll leave the technical forecast at that given how well our thoughtful analysis worked last time.
The Trade on AMD Stock
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For like-minded traders that anticipate upside in AMD stock, but also appreciate the benefits of defined and reduced risk, a collar strategy is one way to position. Reviewing the board and shares at $13.70, a favored spread is the Nov $16 call/$13 put combination for $14.05.
What’s the 35 cent premium over owning AMD stock outright offer bullish traders? The main benefit is limiting risk to $1.05 or 7.5% courtesy of the purchased Nov $13 put which acts as definitive insurance for the underlying shares.
The real cost for this bullish AMD position is the sold Nov $16 call whose premium is used to help offset the purchase price of the put by about 50%.
Ultimately, being short the call means the trader’s upside potential is initially capped. This compromise amounts to an expiration gain of nearly 14%, or almost double the downside risk! That can always be adjusted to meet new and future expectations. Which means that AMD stock looks a more attractive through earnings using the collar strategy.
Investment accounts under Christopher Tyler’s management currently own positions in AMD stock and / or AMD derivatives, but no other securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
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