Why AMD's Soaring Stock May See a Sharp Pullback

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

After a hot start to 2018, shares of Advanced Micro Devices Inc. (AMD) could be set to turn the other way. The stock has risen by nearly 23% so far in 2018, but some options traders are betting on a significant reversal by April. Some bets are looking for shares of AMD to fall by about 19%, which would take the shares to about $10. (For more, see also: AMD May Have Bottomed, Stock Set to Rise.)

The company is set to report results on January 30 after the close, and analysts are looking for revenue to have climbed in the fourth quarter by roughly 26.5% since last year, while earnings are expected to remain flat at $0.05, according to Ycharts. The last two times AMD reported results the stock fell by roughly 25% on May 2, and about 14% on October 25, after disappointing the Street. 

AMD Chart

AMD data by YCharts

Wide Range

With the last two quarterly reports leading to significant losses, it is no wonder why options traders are so bearish on AMD going forward. The long straddle set for expiration on April 20 suggests that AMD shares could rise or fall by nearly 19%, putting the stock in a massive range from roughly $10.50 to $15.50. That is because the cost to buy one put and call at the $13 strike is about $2.45. The number of open calls outweighs the puts, with nearly 44,000 call contracts open, while there are only 35,000 put contracts open. But the notional value of the open puts stands at roughly $5 million vs. $4.5 million for the calls. (For more, see also: AMD Stock May Be Headed for Single Digits.)

(Interactive Brokers)

Bearish Bets

Additionally, the options table shows sizable open interest on the puts going all the way down to the $10 strike price where nearly 69,000 contracts of open interest rest. But it is worth noting that the notional value for those contracts are roughly $1.9 million, which is not very much. But it would still require shares of AMD to fall to nearly $9.75 just for the puts to break even. 

Bullish Hope

There are also bullish bets being placed as well, with good size around the $15 strike which carries a notional value of about $2.2 million—again fairly small in size. 

But for now, it would seem more are betting for shares of AMD to fall from its current price over the next few months. That direction is likely to be determined when the company reports results next week. 

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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