How Options Traders Are Playing 2 Hot Chip Stocks

Speculative players are responding to the Spectre-driven chip sector volatility

Managing Editor
Jan 22, 2018 at 2:17 PM
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Semiconductor heavyweights Advanced Micro Devices, Inc. (NASDAQ:AMD) and Intel Corporation (NASDAQ:INTC) have been in the headlines lately, with AMD capitalizing on initial reports of Intel's recent Spectre security flaw -- then admitting its own chips were also vulnerable. Speculators have responded by rushing to trade AMD options; this week, the stock takes the No. 9 spot on our list of equities with the highest total options volume during the past 10 days (data courtesy of Schaeffer's Senior Quantitative Analyst Rocky White).

However, not far behind is INTC stock, falling just one spot out of the top 10. Below are the rest of the top 20, with newcomer IBM (IBM) highlighted in yellow -- and here's a closer look at recent options activity on AMD and Intel.

Most Option Volume All Eq Jan 22

AMD Targeted for a Big Bear Spread

Up 0.4% at $12.64 at last check, Advanced Micro Devices stock picked up 28% over the past 12 months, and late last week reclaimed a spot above its recently troublesome 200-day moving average. However, the stock has struggled since forming a double-top around $15.50 in February and July 2017, having set a couple of lower highs since then. Plus, AMD is preceded by its reputation as the worst stock to own during the second year of a presidential cycle.

At least one analyst has responded by lowering expectations for AMD, as Susquehanna last week cut its price target to $13 from $15. Currently, 11 out of 19 analysts following the tech concern carry "hold" or "sell" ratings, with an average 12-month price target of $14.15.

Digging deeper, quite a bit of the volume on AMD over the last 10 days was due to a large, firm-generated synthetic short spread back on Jan. 12, using about 20,000 contracts each at the July 14 call and put. This strategy, which mimics the risk/reward setup of a traditional short sale, will profit if AMD declines through mid-summer.

Meanwhile, traditional short interest fell 5.4% during the past two reporting periods, but still represents a hefty 20% of AMD's total available float -- or five times the equity's average daily trading volume.

Intel Speculators Hedge Against a Retreat

AMD's sector peer INTC is up 1.3% to trade at $45.42 at last check, and on track to settle above its 20-day and 50-day moving averages for the first time since Jan. 3. It's been a choppy stretch for Intel shares following a late-October bull gap, but the Dow component has consistently found support in the $42.50-43 range. 

The security has won over quite a few analysts with its six-month surge of 31.7%. Of the 25 brokerages covering INTC, 16 rate the stock a "buy" or "strong buy" -- but the average 12-month price-target of $47.14 is less than 4% north of current levels.

INTC options traders have been more optimistic than usual of late. During the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), INTC has racked up a call/put volume ratio of 2.90, which ranks in the 72nd percentile of its annual range -- meaning calls have been bought to open over puts at a faster-than-usual clip.

However, the April 40 put has seen the single largest increase in open interest during this time frame, with nearly 60,000 contracts added. According to Trade-Alert, most of this open interest was accumulated on Jan. 12, and the volume suggested hedging activity on the part of shareholders. In other words, traders were buying these out-of-the-money puts to protect some of the post-bull gap paper profits they'd racked up on INTC.

Elsewhere, Intel stock's short interest fell more than 21% during the past two reporting periods, and now represents only 2.5% of the stock's total available float. At INTC's average daily trading volume, it would take less than four days for shorts to cover their bearish bets.



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