(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Advanced Micro Devices (AMD) shares are spiking by over 5 percent today, to $13.40, after the company announced its newest AMD Embedded Radeon E9170 Series graphics processing unit. The hotly-anticipated Polaris-based Radeon E9170 offers three times the power of previous Advanced Micro Devices GPUs. 

In response, options trading is surging, with nearly 199,000 total contracts traded midway through Tuesday, above the average daily volume of 189,000. The most active options are set to expire on October 6, where the $13 and $13.50 strike prices are seeing a surge in call buying, which means traders are expecting the stock to climb further. The options trading suggests there's more going on than just excitement around AMD's latest chip, but the implied volatility and time to expiration does not support that. 

Calls are trading at a pace of nearly 4:1 over the puts on the day. The $13.50 calls set to expire in 3 days have traded nearly 23,000 contracts, versus only 700 puts. The implied volatility for the contracts is almost eight times more than the S&P 500, at 44 percent, versus only 6 percent. (See also: What is an Option's Implied Volatility and How Is It Calculated?)

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Big Bets

The $13.50 calls would need to trade at $13.70 to break even, with them currently trading at 0.20 per contract. Meanwhile, the $13 calls are trading at nearly $0.50, meaning they need to trade at $13.50 to break even. Because the options come at such a low price, it gives traders a way to get long shares without having to put up much principal.

For example, the 23,000 contracts at the $13.50 strike price is the equivalent of 2.3 million shares at a price of only $415,000. Going into today's trading, there was an open interest of only 11,600 contracts open at the $13.50 strike. With the volume today, it is more than double the open interest.

Extreme Implied Volatility

The volume is flowing through into expiration on November 17, with nearly 3,000 contracts trading at the $13 strike, meaning the stock needs to rise to $14.30 based on the contract price of roughly $1.30. Again, implied volatility is extremely high, at 56 percent. The premium paid plus the strike price suggest that shares of Advanced Micro Devices need to rise by nearly 7 percent over the next 45 days. (See also: AMD Short Interest Hits Record High.)

The betting today cannot be understated. Traders are making bets that the price of the stock will rise over the next couple of days. They are otherwise putting money into option contracts that are practically worthless without an incredibly high level of implied volatility. This tells us that traders are looking for something more to happen than just the rollout of AMD's latest chip. 

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 holdingsInformation 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.

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