AMD Option Bulls Pay Steep Premiums as Stock Pops

Now's a bad time to buy those AMD calls you've been eyeing

Jan 3, 2018 at 11:50 AM
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Chip stocks are hot today, with rivals of sector behemoth Intel (NASDAQ:INTC) catching a big boost from reports of a design flaw in Intel microprocessors produced over the last decade that compromises security. While INTC is down more than 3.7% -- and the biggest decliner on the Dow today -- primary rival Advanced Micro Devices, Inc. (NASDAQ:AMD) is soaring.

AMD stock is up 7.2% at $11.77, and on track to close above its 50-day moving average for the first time since Oct. 24 -- which was the trading day just prior to a massive earnings-related bear gap for the shares. The equity is still trading well below former support at its 200-day moving average at $12.38, which was breached during that late-October sell-off, but AMD has now rallied roughly 21% from its lows of about a month ago.

amd daily two-year price chart

AMD options volume has exploded today, with approximately 197,000 calls and 42,000 puts exchanged so far -- representing quadruple the stock's intraday norm. The top two strikes at midday are the January 2018 12- and 14-strike calls, where it appears that some traders may be rolling their AMD calls up to a higher strike.

As speculative players rush to buy calls on Advanced Micro Devices, option prices on the chip stock are getting pricey. Trade-Alert pegs AMD's 30-day at-the-money implied volatility (IV) at 63.4%, which registers in the 76th percentile of its annual range. In other words, short-term options on AMD have priced in higher volatility expectations only 24% of the time in the last year.

Even more notably, the 30-day IV skew is docked at -7%, which means calls are commanding a higher volatility premium than their put counterparts. Earlier in the session, that metric fell as low as -7.9%, in the 1st annual percentile.

So for those considering a bullish play on AMD in the wake of Intel's chip troubles, be aware that there's an unusually steep price to pay for doing so at the moment. When IV levels inevitably deflate, those options will lose value rapidly -- and from a technical perspective, additional upside could be limited by that looming 200-day moving average in the short term.



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