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A 9.5% decline since the end of July hasn't dissuaded Advanced Micro Devices, Inc. (NYSE:AMD) optimists from continuing to bet on a bounce. Tuesday, additional option players climbed aboard the already crowded bullish bandwagon, scooping up short-term bullish bets.
Total option volume ramped up in AMD option pits yesterday, as 43,000 contracts changed hands (close to three times what's seen on an average day). The September 3.50 call was in greatest demand, with nearly 7,000 options trading, the lion's share of which translated as new open interest today. Given the modest pop in implied volatility, and the fact that 92% of the trades went off at the ask price, we can assume these calls were purchased to open.
Traders who bought these long calls -- for a volume-weighted average price (VWAP) of $0.13 -- are expecting AMD to rally to $3.63 (strike price plus VWAP) over the next three weeks or so, ahead of September options expiration. This is a 6.5% bump from the stock's current price of $3.41. There could be another motive for these speculators, however; nearly one-quarter of AMD's float is sold short, so recent long-call demand could be the result of bearish traders hedging their bets. Delta for the call currently rests at 0.43 (down from 0.59 at Monday's close). In other words, the options market gives the option a 43% chance of being in the money by the time it expires.
Whichever way these long call buyers are intending to play their positions, they are paying a premium to do so. Implied volatility for the September 3.50 call currently stands at 51.4%, well above the one-month historical volatility of 25.7%.
As noted, Advanced Micro Devices, Inc. (NYSE:AMD) has been in downtrending mode of late. The stock recently breached its 20-week moving average, above which the stock had been trading since late April.