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

Advanced Micro Devices Inc. (AMD) stock could be gearing up for a big move higher, with traders betting the shares can rise by nearly 21 percent over the next few months. Analysis of the options market shows that the options set to expire on January 19 with the $14 strike price suggest shares of the chipmaker could rise to nearly $17 by expiration. That is because the call options are favored by a ratio of almost 2.5 to 1 over the puts. 

Shares of AMD have risen by nearly 22 percent so far in 2017, outperforming the S&P 500 by almost eight percentage points. However, that increase has been anything but smooth and steady, with the stock trading within a range of nearly 40 percent over the course of the year. That is a wide range of volatility. Due to this, the options are cheap, reflecting an implied volatility of just over 51 percent. 

AMD Chart

AMD data by YCharts

Price Rise

The long straddle strategy using the $14 strike price – an options strategy that involves buying a put and a call – suggests that AMD can trade within a range of $11 to $17 a share by the time the January 19 expiration comes around. The trading range comes from the premium being paid to buy one call and one put, which is a 21 percent rise or fall from the current stock price of $13.75.

The call options are favored, with nearly 33,000 contracts of open interest, while the puts only have an open interest of roughly 13,000 contracts. The $15 strike price calls have 122,000 contracts of open interest, while the stock would need to trade at about $16 to break even. This is because the calls trade at about $1, and there only 24,000 contracts open on the puts. The $13 strike price is almost even regarding the number of puts to calls, with the puts at around 25,000 contracts. 

(Interactive Brokers)

Massive Volatility

The implied volatility, which is a measure of the expected future volatility, is very high for AMD, at 51 percent. By comparison, the S&P 500 has an implied volatility of just 9 percent. This tells us that the markets are expecting volatility to remain high for AMD. The stock's implied volatility suggests just a one standard deviation move could send shares soaring or falling by 27 percentage points, which is huge. 

There is no doubt that shares of Advanced Micro have been extremely volatile this year. And traders are betting that won't subside anytime soon. (See also: AMD Traders Make Big Bets In Quest For Fast Gains.)

 

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.

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