4 Reasons We Didn't Trade Advanced Micro Devices Call Options

Advanced Micro Devices (AMD) stock has been stellar in 2017, but the backdrop wasn't right for a long call position

Apr 3, 2017 at 10:33 AM
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Our traders are stalking a lot of different stocks throughout the week, but not every potential trade idea develops into a formal recommendation to our subscribers. Whether it's the break of a key technical level for the shares, an unexpected news announcement, or an unfavorable options pricing environment, this regular feature will shed some light on the factors we view as "deal breakers" to otherwise intriguing trade setups. Today, Schaeffer's Senior Trading Analyst Bryan Sapp chimed in on one stock he was recently toying with -- but ultimately rejected -- for a long call position in Schaeffer's Weekly Options Countdown service: Advanced Micro Devices, Inc. (NASDAQ:AMD).

What He Liked About AMD Calls

Specifically, AMD caught Sapp's eye because:

  1. AMD is up nearly 30% year-to-date, and a whopping 420% year-over-year.
  2. The stock was in a symmetrical triangle pattern at its highs -- "generally a continuation pattern, which implies more upside," according to Sapp.
  3. Nearly 15% of Advanced Micro Devices' float is sold short, despite the shares being up a ton.
  4. The stock's Schaeffer's Volatility Index (SVI) of 50% is higher than just 4% of all other readings from the past year, indicating near-term options are attractively priced, from a historical volatility standpoint.
  5. In the same vein, AMD sports a Schaeffer's Volatility Scorecard (SVS) of 98, indicating the stock has exceeded options traders' volatility expectations during the past year.
  6. Just half of the analysts following AMD stock deem it worthy of a "buy" or better rating, leaving the door open for upgrades.

Why He Backed Out of an AMD Trade

However, Sapp ultimately rejected weekly 4/7 AMD calls due to the following:

  1. AMD was hyped constantly last week on CNBC, namely by the Najarians. "I hate buying post-hype situations," he said.
  2. During the past 10 days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX  PHLX (PHLX), more than two AMD calls were bought to open for every put.
  3. There's heavy call open interest overhead in the April series of options, including the weekly expiring contracts. This could translate into an options-related speed bump for AMD shares in the near term.
  4. Finally, the risk/reward didn't align for an AMD weekly call. "The 50-day moving average and $13 level is my major support area, so you'd have to risk over $1 to stay in the trade," Sapp said. "By risking $1 from here, you'd need a move well above AMD's former highs at $15.50 to get a 3-to-1 reward/risk setup, which is a deal-breaker for me. Chance are, the first test of $15.50 will be met with selling, and then the stock could move sideways for a bit."

amd stock chart today


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