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Is the Worst Over for Advanced Micro Devices?

AMD speculators bought short-term calls and sold long-term puts

by 12/3/2012 9:46 AM
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Since touching a three-year low of $1.81 on Nov. 16, the shares of Advanced Micro Devices, Inc. (NYSE:AMD - 2.30) have improved roughly 27%. As such, it looks like the options crowd is placing neutral-to-bullish bets on the semiconductor concern, while short sellers might be protecting their pessimistic positions.

During the course of Friday's session, the equity saw roughly 18,000 calls and 12,000 puts change hands, far surpassing its average daily volume of around 7,200 calls and 2,700 puts. Most popular by a mile was the out-of-the-money July 1.50 put, which saw 7,150 contracts cross the tape -- all in one fell swoop at the bid price of $0.14 each, suggesting they were sold. Plus, put open interest at the strike skyrocketed over the weekend, confirming our theory of sell-to-open activity.

By writing the puts to open, the seller is expecting AMD to remain north of $1.50 through the next several months. In this best-case scenario, the puts will expire worthless, allowing the trader to retain the entire premium received at initiation.

Meanwhile, nearly 3,800 contracts changed hands at the January 3.50 call -- almost all of them at the ask price, suggesting they were bought. Plus, call open interest at the back-month strike swelled by nearly 3,600 contracts over the weekend, confirming new positions were added.

By purchasing the calls to open, the buyers have one of two motives: to profit from a rally north of $3.56 (strike plus volume-weighted average price of $0.06) -- implying expected upside of about 62% to AMD's current price -- or to protect a short position. In the case of the latter, the long call provides an acceptable price in which to repurchase the shares, should AMD skyrocket within the next few weeks.

What's more, short interest on the security jumped about 7% during the past month, and now represents nearly 31% of AMD's total available float. In fact, at the stock's average daily trading volume, it would take more than a week to buy back all of these bearish bets.

Technically, the shares of AMD have surrendered more than half their value in 2012, but have chipped away at their year-to-date deficit in recent weeks. At last check, the stock has added 4.5% to wink at the $2.30 level.

Fundamentally, the firm last week said it's hoping to sell its Austin, Texas, campus, but sign a leaseback contract allowing it to maintain operations there. The sale is expected to generate around $150 million to $200 million, according to Dow Jones.


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