(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Activity on Advanced Micro Devices Inc. (AMD) options for April 20 expiration was notably heavy and bearish on Friday, March 2. That suggests the stock could see a massive surge in volatility over the next several weeks, part of a bigger bet that shares may be heading lower. An analysis of the technical charts indicates that the stock could be ready to fall by as much as 17% over the next several weeks. (For related reading, see: Why AMD Is Intel's Only Competitor.)
Shares of AMD have performed well in 2018, with the stock up nearly 15%. But a trader is making a rather substantial bet that shares may be about fall. According to reports on TheFly, sizable put option purchases on Friday were also tied to the purchase of the stock.
Surging Put Volume
The large blocks of put options took place on March 2, trading at the $10, $11 and $12 strike price set to expire on April 20. The number of contracts traded was for a total of 250,000 contracts between the three strike prices. The notional value of the three trades came to roughly $12.5 million based on the options closing prices. The options trade, if for hedging purposes of a large purchase of stock, could indicate the buyer of the puts is looking to protect their stock purchase from a sharp decline in the coming weeks.
The long straddle options strategy, using the $11 strike price for expiration on April 20, is already implying that shares of AMD could rise or fall by nearly 19% by expiration from the $11 strike price, a considerable amount. The cost to buy one put and call is roughly $2.10 and gives the stock a trading range of approximately $8.90 to $13.10. But the number of puts heavily outweigh the number of calls by a ratio of nearly 8 to 1, with almost 206,000 contracts of open interest. The open interest does not count the volume from Friday, meaning the options market was already bearish on AMD before the trades. It indicates that traders are betting shares of AMD will fall over the next few weeks. (For more, see also: AMD: The Long-Term View.)
A Decline to $9.80
The technical chart for AMD would suggest shares could also fall, as the stock has been trending lower since late July when peaking around $15.50. The stock has also refilled a gap created at the end of October and has been trending lower since. The stock has a relative strength index that has been trending lower, and currently has a reading of roughly 47. The RSI would need to fall below 30 for the stock to be oversold. The next meaningful technical support level lies around $9.80, a decline of 17% from its current price of roughly $11.80.
The recent large put options purchases, the long straddle strategy, and the technical chart, seem to altogether point to a stock that is likely to lose almost all of its gains in 2018 in the coming weeks.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.