Stocks quoted in this article:
Advanced Micro Devices, Inc. (NYSE:AMD) is down 0.9% to flirt with $4 -- in the neighborhood of its year-over-year breakeven level -- and options traders are either gambling on or hedging against a long-term slide. So far today, more than 6,100 AMD puts have changed hands, a slight mark-up to the stock's average intraday volume, compared to fewer than 5,800 calls.
While demand for short-term options is on the rise -- as evidenced by AMD's 30-day at-the-money implied volatility (IV), which is 1.5% higher at 32.4% -- LEAPS are the options of choice today. Specifically, the January 2016 2.50-strike put is most active, with more than 2,000 contracts exchanged. Nearly three-quarters of the puts traded on the ask side, and IV is edging higher at the strike, hinting at buy-to-open activity.
If the buyers are "vanilla" option bears, their goal is for AMD to be sitting south of $2.20 (strike minus volume-weighted average price of $0.30) when January 2016 options expire. From the stock's current perch, it would take a decline of about 45% in order to perforate breakeven -- which stands in territory not charted since late 2012. The buyers' profit will increase with each step south of this marker, but is limited to $2.20 per contract, should AMD fall to zero.
On the other hand, the buyers could be AMD shareholders looking for long-term "insurance." By purchasing protective puts, the buyers -- who may have scooped up AMD when it was trading under $2 in late 2012 -- will lock in an acceptable price at which to sell their shares, should the stock take a turn for the worse. Specifically, the buyers can unload their stakes at $2.50 per share, representing a premium to what they'd receive on the Street.
Regardless of motive, the most the buyers will lose at expiration, assuming AMD remains north of the strike, is the initial premium paid for the puts. Delta on the deep out-of-the-money contracts stands at negative 0.14, implying a roughly 14% chance of expiring in the money.
Broadening our sentiment perspective, today's appetite for long puts runs counter to the growing trend. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume ratio of 8.70 ranks in the 85th percentile of its annual range. In other words, option buyers have picked up AMD calls over puts at a faster-than-usual clip during the past two weeks. It's worth noting, though, that short interest accounts for almost 18% of Advanced Micro Devices, Inc.'s (NYSE:AMD) total float, suggesting some of the recent call buying could be attributable to hedging activity on the bears' side.