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Advanced Micro Devices, Inc. (AMD) Traders Make a Gutsy Call

Are Advanced Micro Devices, Inc. shorts using calls to hedge?

by 6/10/2014 10:35 AM
Stocks quoted in this article:

Advanced Micro Devices, Inc. (NYSE:AMD) has been making steady strides since hitting a year-to-date low of $3.29 in early February, with the shares up nearly 28% to trade at $4.20. This move higher has not gone unnoticed by option traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Specifically, speculators on this trio of exchanges have scooped up 27.62 long calls for each put in the past two weeks. What's more, the resulting ratio ranks in the 95th percentile of its annual range, meaning calls have been bought to open over puts at a near-annual-high clip in recent weeks.

It was a similar backdrop on Monday, where calls traded at a 59% mark-up to typical levels, and outpaced puts by a nearly 6-to-1 margin. The most active strike was AMD's January 2015 5-strike call, and it appears a number of speculators either bet on a move to levels not seen in almost two years, or hedged against one.

Of the 6,320 contracts traded at this deep out-of-the-money (OOTM) strike, 96% were exchanged at the ask price, and almost all of the positions translated into open interest overnight. Simply stated, it seems safe to assume the majority of contracts were bought to open. Based on the volume-weighted average price (VWAP) of $0.27, breakeven at expiration on Friday, Jan. 16, 2015, is $5.27, or the strike plus the VWAP. Gains are theoretically unlimited beyond this mark, while losses are capped at 100% of the premium paid, should AMD finish south of $5 at expiration.

As indicated, though, AMD has not seen the north side of $5 since July 2012, and more recently, the equity has struggled to hurdle the $4.10 mark. Against this longer-term technical backdrop, short interest on the stock is sitting 30% higher than it was in early July 2012, and currently accounts for 18% of the stock's float. As such, a portion of Monday's activity at the OOTM January 2015 5-strike call could be a result of short sellers hedging against any additional upside.

In today's session, Advanced Micro Devices, Inc. (NYSE:AMD) is extending its trek north, thanks to a pair of bullish brokerage notes issued toward the stock overnight. What's more, today's 3.3% pop has the equity trading comfortably north of the aforementioned $4.10 mark.


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