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Advanced Micro Devices Premium Sellers Active Ahead of Earnings

AMD's October 3-strike put saw a rash of sell-to-open activity on Wednesday

by 10/11/2012 10:53 AM
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Put selling was the strategy du jour on Advanced Micro Devices, Inc. (NYSE:AMD - 3.17) on Wednesday. Nearly all of the 7,978 puts that traded yesterday crossed the tape at the October 3 strike. Of these 6,333 contracts, 81% changed hands at the bid price, and open interest rose by 4,942 contracts overnight, pointing to the initiation of short put positions.

By selling these out-of-the-money puts to open, neutral speculators are expecting AMD to maintain its perch above the $3 mark through next Friday, when these front-month options expire. In this best-case scenario, the investors will be able to pocket the full potential profit, or $0.06 (which Trade-Alert indicated was the volume-weighted average price). Meanwhile, the risk associated with put selling (should the underlying stock drop to zero) is limited to the strike minus the premium paid, or $2.94 in this case.

For a stock that's sporting a 41% year-to-date deficit, though, option players have had no qualms about using puts in their traditional bearish form in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio of 0.57 ranks higher than 76% of other such readings taken in the past year. In other words, puts have been bought to open over calls at an accelerated clip over the last 10 weeks.

As touched upon, AMD has had a depressing run on the charts in 2012. On the heels of its fiscal first-quarter earnings release in late April, the stock surrendered a perch atop its 40-day moving average, and has since been ushered lower by this trendline. Moreover, during the past 60 sessions, the equity has lagged the broader S&P 500 Index (SPX) by more than 38 percentage points, on a relative-strength basis.

The semiconductor concern is once again slated to take its turn in the earnings confessional on Thursday, Oct. 18 (the day before October options expire). This scheduled event has caused AMD's implied volatility levels to soar, which may have prompted yesterday's rush of sell-to-open activity. In fact, the stock's Schaeffer's Volatility Index (SVI) of 70% ranks in the 76th percentile of its annual range. More specifically, implied volatility on the October 3 strike-put is currently inflated relative to its 20-day historical (realized) volatility (68% v. 53.9%), indicating now is an opportune time to sell premium on AMD.

For AMD's third quarter, Wall Street is calling for a per-share profit of one cent.

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