Advanced Micro Devices, Inc. (AMD) Calls Catch Fire as Stock Soars to Higher Highs

Calls are hot on overbought Advanced Micro Devices, Inc. (AMD)

Dec 27, 2016 at 3:18 PM
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Semiconductor stock Advanced Micro Devices, Inc. (NASDAQ:AMD) has been a standout performer on the charts in 2016, and today is no exception. The stock has added 3.8% to $12.03, rallying alongside several sector peers, and earlier reached a fresh nine-year high of $12.07. Not surprisingly, speculators are scooping up AMD's call options at a relatively rapid rate.

Digging more deeply into the technicals, one would think the chipmaker is ready for a breather. After all, the shares have tacked on a jaw-dropping 319% in 2016, including a gain of 72% since their Election Day close at $7. As a result, AMD's 14-day Relative Strength Index (RSI) is perched at 81.5, deep in overbought territory.

At last check, AMD calls were trading at 1.7 times the usual intraday pace, with call volume running in the 95th percentile of its annual range. Moreover, call open interest is already seated just 2 percentage points from a 12-month high. Most active by a mile today is the January 2017 12-strike call, with nearly 29,000 contracts on the tape.

Drilling down, it appears a fair number of these calls have been bought to open, with buyers betting on a run to higher highs by front-month expiration, at the close on Friday, Jan. 20. But the bulk of the volume at this call comes from two sweeps of 10,000 contracts each, which the International Securities Exchange (ISE) suggests were bought to close. In fact, data from Trade-Alert indicates a trader was closing out the upper leg of his risk-reversal at the January 7 put and 12 call.

From a broader perspective, call buying has been popular in AMD's options pits, with long calls roughly tripling long puts over the past 10 days at the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). However, this represents a lower-than-usual skew toward long calls, as the resulting call/put volume ratio of 3.01 sits below roughly two-thirds of the past year's readings.

Whether on the put or call side, this appears to be a prime time for near-term options buyers to strike. AMD currently holds a Schaeffer's Volatility Index (SVI) of 61% -- in the low 15th percentile of its annual range. That means the stock's short-term options are well-priced, from a volatility perspective. What's more, AMD's Schaeffer's Volatility Scorecard of 97 indicates the options market has seriously underpriced the equity's ability to make outsized moves in the last 12 months.

Outside of the options arena, AMD -- like one outperforming peer -- has seen a surprising amount of skepticism. Despite the stock's technical feats, nearly 11% of its total float remains wrapped up in short interest. Plus, half of the brokerage firms following the stock maintain a lukewarm "hold" rating. Should this pessimism unwind in light of equity's run higher, Advanced Micro Devices, Inc. (NASDAQ:AMD) may find fuel for its proverbial fire.

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