(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Advanced Micro Devices, Inc.'s (AMD) stock is about to go on an even bigger ride than the stock has had thus far in 2018. Shares of AMD were nearly 30% off their January highs in early April. Later the company reported blockbuster results at the end of April, and since then shares have surged by more than 73%, rising to $16.50. The options market suggests that massive volatility will pick up again after the company reports second-quarter results on July 25 after the close of trading. (For more, see also: Why AMD's Soaring Stock May See a Sharp Pullback.)
Analysts are forecasting the company to report that second-quarter earnings grew to $0.13 per share from just $0.02 a year ago. Meanwhile, revenue is forecast to have climbed by over 40% to $1.73 billion. The company blew out first quarter estimates with earnings topping forecasts by more than 25%, and revenue beating forecasts by more than 5% on the strength of its Ryzen, Vega and Epyc chipsets.
Massive Price Swing Expected
The options set to expire on August 17 imply a massive level of volatility following the company’s quarterly results. The long straddle options strategy suggests that the stock rises or falls by nearly 14% from the $17 strike price. It places the stock in a trading range between $14.70 and $19.35 by options expiration. The number of bets that shares will rise is nearly equal to the number of wagers the stock will fall, with approximately 20,000 open call contracts to 17,000 open put contracts.
Big Levels of Implied Volatility
Implied volatility at the $17 strike price for expiration in August is also extremely high, at over 62%. Suggesting an insanely high level of volatility is expected to come. The implied volatility is nearly seven times greater than that of the S&P 500 for the same expiration period, of only nine. Another company reporting results the same week as AMD is Amazon.com Inc. (AMZN), and it has an implied volatility of about 47%. It suggests that volatility is seen as being higher in AMD than Amazon. (For more, see also: AMD's Breakout Seen Boosting Stock 13%.)
One reason why traders are expecting such a significant level of volatility is the stock's history of big price swings. When the company last reported results on April 25, shares rose by over 39% over the following 30 days. But shares fell by nearly 9% in the days following its fourth-quarter earnings release on January 30.
The big price swings in the stock in the past, combined with its incredible run in 2018, is reason enough to make investors nervous heading into results. The market is expecting a big move in the stock regardless of the results.
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.