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Advanced Micro Devices, Inc. (NYSE:AMD) is up 0.6% at $3.92, and some speculators are expecting the stock to top $4 -- a threshold not crossed since mid-July -- by the end of the month. With the company slated to report earnings in less than two weeks, perhaps the buyers are gambling on -- or hedging against -- a quick uptick after the report.
In afternoon trading, AMD has seen almost 9,100-plus calls cross the tape, more than five times the number of puts exchanged. Most active is the weekly 11/1 4-strike call, where nearly 2,200 contracts have traded at a volume-weighted average price (VWAP) of $0.24. Implied volatility is on the upswing, volume has exceeded open interest at the strike, and 79% of the calls traded at the ask price, pointing to buy-to-open activity.
By purchasing the calls to open, the buyers have one of two motives: to profit from a move north of $4.24 (strike price plus VWAP), or to hedge their bearish bets. Short interest jumped 4% during the past two reporting periods, and now accounts for 22.6% of AMD's total available float -- or nearly a week's worth of pent-up buying demand, at the stock's average pace of trading. Against this backdrop, the buyers could've purchased the calls to hedge against a post-earnings upswing. Whether the objective is "vanilla" bullish speculation or protection, the most the buyers can lose is the initial premium paid for the calls.
As earnings approach, demand for AMD's near-term options is on the rise. The stock's Schaeffer's Volatility Index (SVI) of has risen significantly since touching an annual low of 46% a couple of months ago, and now stands at 63% -- above 41% of all other readings of the past year. Echoing that, IV on the weekly 11/4 4-strike call sits at 60.1%, compared to the stock's two-month historical (realized) volatility of 34.3%. In other words, the contracts are rather expensive, relatively speaking.
On the charts, Advanced Micro Devices, Inc. has added almost 63% in 2013, but has recently struggled beneath the aforementioned $4 level. Off the charts, the company is poised to unveil its third-quarter earnings report after the closing bell on Thursday, Oct. 17. While the firm has topped bottom-line earnings estimates in six of the past eight quarters, AMD averages a loss of 4.2% the week after reporting, and suffered a 20.3% blow after its last earnings release.
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