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Up more than 63% in 2013 to trade at $3.92, Advanced Micro Devices, Inc. (NYSE:AMD) has been targeted by optimistic speculators of late, as my colleague Karee Venema recently noted. In Thursday's trading action, put options took center stage -- more than 22,000 puts changed hands (nearly quadruple the typical daily volume), versus fewer than 8,700 calls. Still, it appears that option bulls were driving the bulk of the action.
Accounting for the lion's share of the day's volume was the January 2015 3.50-strike put, where roughly 18,000 contracts traded (nearly all of which translated as new open interest overnight).
Most of this action was split between two large block trades that went off near the bid price for $0.70 per contract. The International Securities Exchange (ISE) flagged one block of 5,000 contracts as sell-to-open activity, while Trade-Alert theorized that the other block of 12,000 contracts was an opening short bet.
In short, it appears these two large-scale traders sold the AMD puts for a credit of $0.70 per contract, which they will retain as the maximum potential profit at expiration in January 2015 if AMD is still perched above the $3.50 level. (For the record, AMD shares were trading south of this level as recently as Sept. 6.) Should AMD breach the strike price, the put sellers may be assigned, and required to buy the shares for $3.50 apiece, no matter what the market price is at the time.
While these are likely long-term bets that Advanced Micro Devices, Inc. (NYSE:AMD) will stay above $3.50 through the next 15-plus months, another strategy could be at play. Given the high level of short interest (more than 22% of the stock's float), it could be that some traders are writing the puts alongside short-stock positions. If the shares decline below this key level, the investor will likely be obligated to buy the shares at $3.50 -- fulfilling the short-sale obligation -- but earning premium from the sold put in the process.
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