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by Joseph Hargett | July 10, 2021
All right, Great Ones … it’s time for a lesson in options trading, starring Advanced Micro Devices (Nasdaq: AMD).
Granted, if half of that sentence was gibberish to you … you should probably catch up on what we mean by options trading to begin with. Lucky for you, my past self whipped up an options cheat sheet for you right here!
So, what’s the deal with AMD? And why would you even consider trading options on AMD?
Well, there are three things you need for a successful options trade, and Advanced Micro Devices has all of them:
1. You need a stock that will move fast. Fast-moving stocks are perfect for options trading since you have the best chance of the stock making the move you want before your options contracts expire. Trading options on a stock that has the potential to rally extremely high does you no good if “extremely high” takes forever to reach.
2. You need a stock with volatility. In other words, you need a stock that is capable of aggressive, high-percentage moves. In options trading, moving fast is one thing, but if that “fast” move is only 1% or 2%, you’re gonna have a bad time. We need bigger moves — more volatility!
3. You need a stock that will move in the direction you expect. This one is really simple but hard to achieve in practice. If you expect the stock to rally, you buy a call, right? But that call does you no good if your stock falls. You need to buy calls on stocks you’re all but certain will rally.
Now, you’re probably asking yourself: “Does AMD really have all of these things?”
Yes. Yes, it does. And I’m about to show you why.
Let’s go through our options checklist one by one, shall we?
One of the best ways of getting a stock to move fast is a company event, such as earnings, new product announcements, analyst days, etc.
On July 27, Advanced Micro Devices will release its fiscal 2021 second-quarter earnings report. I shouldn’t have to tell you that earnings reports can have a massive impact on stock prices, and AMD stock is no exception.
This event is just 17 days away — how’s that for fast? We’ll just check that off our list.
Next up, you need volatility. You need a big move to bank big gains, right? Well, AMD is just the mover and shaker you’re looking for.
In the last 13 quarters, AMD stock has either gained or lost an average of 8.5% immediately following its earnings report. Now, that’s no 25% spike like Virgin Galactic saw with Sir Richard Branson going into space before Jeff Bezos … but it’s more than enough volatility for the kind of moves you’re looking for.
After all, we want reasonably predictable moves — not bat#%$t crazy rallies that aren’t based in reality.
Checking in with AMD’s options activity, I found that options traders are pricing in a higher-than-normal post-earnings move for AMD stock of 11.3%. For those experienced options traders out there, this is called implied volatility, or IV.
Now, IV is a fancy-schmancy options term that basically tells you how far the options markets expect a stock to move during a specified time frame. Right now, Advanced Micro Devices options traders expect the stock to either rally 11.3% or fall 11.3% by the time August options expire on Friday, August 20.
As of yesterday, AMD’s IV puts the expected upside move at $99.89, while the expected downside move is to $79.59.
So, we have two critical ingredients for our AMD stock options trade: a fast time frame (17 days) and a sizeable potential move (11.3%). All we need now is a direction, right?
Since AMD has a spot in the Great Stuff Picks portfolio, I’m pretty sure you can guess which direction I’m going with this trading idea. That’s right: bullish.
Wall Street currently expects AMD to report a profit of $0.54 per share on revenue of $3.57 billion. Now, it might surprise you to know that Wall Street’s current expectations are slightly below what AMD forecast for the second quarter. During its first-quarter report, AMD said it expects revenue of $3.6 billion.
It should come as no surprise then that actual expectations for AMD’s second-quarter report are also above Wall Street’s target. Specifically, EarningsWhispers reports a whisper earnings number of $0.57 per share.
But both of these figures are probably below what AMD will actually report. During the past four quarters, AMD has beaten expectations by an average of $0.05 per share — meaning the whisper number should probably be closer to $0.59 per share.
What’s more, with AMD on pace to fully bring its Xilinx acquisition onboard in the second half of 2021 — right when the semiconductor shortage is expected to ease up — I also expect Advanced Micro Devices to boost guidance.
In other words, we’re looking at a potential beat-and-raise quarter for AMD. And given Wall Street’s pessimism surrounding the semiconductor sector right now, that means a potential big move for AMD stock.
First, it’s important to remember that options trading isn’t for everyone. It’s risky, and you face the potential for a 100% loss every time you dive into an options trade.
That said, we have a really good setup for AMD heading into earnings, including a fast move, a volatile move and a bullish direction.
So, how do we set up our AMD options trade?
First, we need to pick when our options contract expires. Since we know that AMD will report earnings on July 27, we’re looking at August options.
July options expire this coming Friday, July 16, so they’re right out of the question. Yes, I know these weekly options exist. No, I’m not messing with them here. They’re too volatile and thinly traded to handle outside of a paid options-trading service.
Now that we have our sights set on August, we need an options strike — or the price to which we believe AMD will rally before our contract expires. AMD IV is pricing in an 11.3% move to $99.89. This might get you excited enough to buy an August $100 strike call. Ignore that excitement. Kill it and smash it down.
The expected move almost never happens. What’s more, since the August $100 call costs $1.80, or $180 per contract, you’d need AMD to rally to $102 just to break even on the trade.
I recommend being much more realistic when setting your target. In fact, let’s be really safe and halve that expected move and focus on a rally to $95 — which would put AMD back near its December highs.
And with that, we’ve arrived at our options trade: Buy the AMD August 20 $95 strike call.
As I’m writing this, the AMD August 20 $95 call costs $3.05, or $305 per contract. In order to break even on the trade, AMD needs to rally to $98.05 before these options expire on August 20.
To hit a 100% gain on this options trade, AMD would need to rally to $101.10.
On the plus side, if AMD jumps above $100 following its earnings report, your gains could be even bigger as technical traders and nearly everyone else piles into the stock. Breaking the $100 level is a big deal for many investors, and it will attract bullish attention.
On the downside, a move to $101 for AMD is above the expected move set by IV. In other words, if you’re going for a triple-digit gain on AMD, it’s gonna be risky.
What if I told you there was a way to make nearly a 200% gain on an AMD options trade … with a much smaller move in the stock?
It’s true! And you can do it by using what’s called a debit spread. A debit spread is an options strategy where you buy one option and simultaneously sell another.
If this sounds Greek to you, you will want to bone up on your options-trading knowledge before proceeding.
For those of you willing to risk it, here’s what you do:
You buy the AMD August $92.50 strike call and sell the AMD August $95 call at the same time. If you execute both of these trades simultaneously as a spread trade with your broker (I think even Robinhood allows spread trades), then you won’t need a margin account, which is typically required for selling options.
That trade again: Buy the AMD August 20 $92.50 call and sell the AMD August 20 $95 call.
As I’m writing this, the cost of this debit spread is just $0.92, or $92 per pair of contracts.
Now, entering this debit spread does two critical things. The first is it limits your upside potential. By selling the August $95 call, you do not make any additional gains if AMD rallies above this strike. None. Nada. AMD at $95 is your cap.
However, this debit spread also lowers your breakeven and increases your potential returns on a smaller move in AMD stock.
Breakeven lies at just $93.42. Meanwhile, if AMD closes at or above $95 when August options expire, your return balloons to $2.50, or $250 per pair of contracts. That’s a gain of 171%!
Sure, AMD could surge extremely high and offer even bigger returns on the uncapped August $95 call. But personally, I wouldn’t be willing to take that risk. Your risk tolerance may vary.
What, debit spreads too heavy for a Saturday morning? Fine…
So, here’s the deal, Great Ones. With options, you have … well, options. Both trade ideas above will scratch your trading itch … if you’re looking to get into a trade right away. But buying options before AMD’s earnings report isn’t the only way you can play the event.
Many options traders, including some of my fellow options nuts here at Banyan Hill, actually wait until a company’s earnings report drops to start trading options.
My colleague Chad Shoop created a system that provides trade signals on 75 specific stocks after their earnings report.
They’ve captured far more consistent moves with this system, such as 244% in five days, 175% in eight days and 289% in three months.
It’s an invaluable tool for earnings season, which is just getting started. Learn more right here!
Thank you for coming to my AMD options TED Talk and have a tremendous weekend, Great Ones! And if you have that burning yearning that only more Great Stuff can satisfy, you should check out our deets here:
Until next time, stay Great!
Editor, Great Stuff