LEAPS Bears May Want to Consider This Chip Stock

It could be time to buy long-term puts on the chip stock

Jan 16, 2018 at 12:57 PM
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Chip stocks are trading higher with the broader stock market today, boosted by a fresh round of bullish brokerage notes for Nvidia (NVDA). Among those rallying with its sector peers is Advanced Micro Devices, Inc. (NASDAQ:AMD), last seen trading up 0.7% at $12.10. However, the shares remain stuck below two key technical levels, and if history is any guide, AMD stock could underperform this year. Specifically, it is the worst stock to own during the second year of a presidential cycle.

President Donald Trump is about to wrap up his first year in office, with the S&P 500 Index (SPX) up more than 30% from its Election Day close on Tuesday, Nov. 8 -- earlier toppling the 2,800 mark for the first time ever. And while the second year of a presidential cycle has historically been volatile, according to Schaeffer's Senior Quantitative Analyst Rocky White, AMD shares -- unlike these Apple suppliers -- have consistently underperformed, averaging an annual loss of 26.67% since 2006. In fact, the stock has not finished positive in the second year of the past three presidential cycles.

worst stocks to own 2nd year presidential cycle

Based on AMD stock's current perch, a move of this magnitude would put the shares near $8.87 -- territory not seen seen since late 2016. And while the security spent most of 2017 climbing to levels not seen in 10 years, eventually topping out at a 10-year high of $15.65 on July 26, it's been struggling since hitting this notable milestone.

More specifically, Advanced Micro Devices stock plunged below its formerly supportive 200-day moving average during a late-October bear gap. This trendline -- along with the $12.20 region, a 23.6% Fibonacci retracement of rally from February 2016 through February 2017 -- have contained AMD's rally attempts so far this year. In fact, the equity hasn't finished a week north of either since late October.

Options traders have been unusually bullish on the stock in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), AMD's 50-day call/put volume ratio of 3.52 ranks in the 98th annual percentile, meaning calls have been bought to open over puts at a quicker-than-usual clip.

However, some of this activity -- namely at out-of-the-money strikes -- could be a result of shorts initiating options hedges against any upside risk. After peaking in the Dec. 15 reporting period, short interest on AMD is down 5.1% at 167.46 million shares. This still accounts for one-fifth of the stock's available float, or five times the average daily pace of trading.


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