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Advanced Micro Devices Faces Off with Descending Trendline

One bullish bettor initiated a three-tiered credit spread on AMD

by 6/7/2012 9:13 AM
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Microprocessor maker Advanced Micro Devices, Inc. (AMD - 6.02) was the center of a bullishly slanted options strategy on Wednesday, as the shares powered more than 3% higher in the wake of encouraging comments from CEO Rory Read. Specifically, Read projected Windows-based tablets to capture 20% of the global tablet market within the next five years, compared to just 2% to 3% currently; noted the company's possible hunt for acquisitions in the cloud computing industry; and forecast strong demand from first-time computer users in emerging markets such as China and India.

Against this backdrop, it looks like one trader bought several hundred out-of-the-money July 7 calls for the ask price of 15 cents apiece. While this in itself would be a bullish play, the investor funded the position -- though sacrificed some of his potential profit -- by simultaneously selling an equal amount of July 5 puts for 12 cents, and July 8 calls for 4 cents, resulting in a net credit of a penny per trio of contracts ([$0.12 + $0.04] - $0.15).

In the best-case scenario, the shares of AMD will continue yesterday's uptrend and make their way north of $7. However, thanks to the sold 8-strike calls, the strategist's maximum profit is capped at $1.01 per trio of contracts (difference between call strikes plus net credit), no matter how far the stock soars north of $8. On the other hand, thanks to the sold puts, the investor can still pocket the initial credit of a penny, as long as AMD remains above the $5 level through July options expiration.

Technically speaking, the shares of AMD are now neck-and-neck with their 10-day moving average, which -- along with its 20-day counterpart -- has ushered the stock significantly lower since late March. However, the equity's Relative Strength Index (RSI) now sits at a low 34, suggesting the stock could be due for an oversold bounce.

Should the security extend its recent jump and spook any skeptics, there's plenty of sideline cash to fuel additional gains. After soaring 17.5% during the past month, short interest now represents about a week's worth of pent-up buying demand, at AMD's average pace of trading. Plus, more than half of the 28 analysts following the stock maintain "hold" or worse opinions, leaving plenty of room for upgrades. However, in order for sentiment to shift, AMD will likely have to flex some more muscle on the charts first.

Daily Chart of AMD since March 2012 With 10-Day and 20-Day Moving Averages


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