(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Many investors in Advance Micro Devices Inc.'s (AMD) are justifiably concerned that the stock will plunge short term. The stock already has fallen by more than 7% since March 21, when an Investopedia story said the stock could plunge by mid-April. But long-term investors in AMD may have reason to be even more bearish. Options traders are betting the stock will fall another 20% by January 2019 from its current price around $10.55. That is a breathtaking decline in the wake of the 23% drop from its high this year. (See also: AMD's Stock Is on the Verge of a Breakdown.)
The option bets show that the stock is expected to fall to a price below $8.50 by options expiration on Jan. 18, 2019. It is no small bet either; it has a market value of nearly $25.9 million. The options do not come cheap either, with AMD's implied volatility of 53%, and with 298 days until expiration, the time value is steep.
The $10 strike price, long straddle strategy set to expire in January is implying the stock will rise or fall by nearly 39% from the strike price. It puts the stock in a trading range between $6.10 and $13.90, a massive range, and gives the stock downside risk of nearly 43% from its current price around $10.50 on March 26. But the big part is the put-to-call ratio, with the number of put contracts outweighing the calls by nearly 3.3 to 1, with 169,000 put contracts of open interest. With those options trading around $1.50 per contract, it gives the options a market value of almost $25.3 million versus the market value for the calls of only $11.8 million.
Loading Up On Puts
The option volume for the puts has been taking place since the start of the year, but the most massive volume came around the beginning of March when the options were trading a price in a range of $1.17 to $1.25. It tells us that even at the time the traders were looking for the stock to drop to $8.75 just for the options to breakeven, and this was when the stock was trading in a range of $11.50 to $12.
Technical Chart Is Weak
The technical chart is also looking strained, and with the stock recently falling below a critical support level at $10.70 it increases the odds of the stock falling even further, perhaps to around $9.80. But it is at $9.80 that the chart gets interesting, because should the stock fail at the price, the stock has a long way to fall to nearly $8.15.
The performance of AMD's stock price so far in 2018 has been less than stellar, and the options traders are betting its performance turns to flat-out bad.
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.