While investors generally think in terms of months if not years, options traders think in terms of weeks, maybe even days or hours. Trading can be rewarding because of the speed and leverage involved. At the same time, the practice tends to be awfully binary — you either win big or you lose your entire principle. If you can handle the heat in the kitchen, you’ll want to keep close tabs on Advanced Micro Devices (AMD).
As one of the top semiconductor giants, Advanced Micro Devices, has skyrocketed over the past several years due to the emergence of innovative sectors such as cryptocurrencies and artificial intelligence. That said, economic challenges and broad competitive pressures have weighed on AMD stock. Since the start of this year, shares are still down about 9%. At the same time, AMD popped over 14% in the trailing month, reflecting a tech sector recovery.
Advanced Micro Devices (AMD) stock price history year-to-date
Within the raw price discovery process, market breadth data suggests that AMD stock can continue taking this positive momentum to higher ground. As a result, I’m taking a bullish position on AMD stock. As traders, we’re looking for the how of the market — how much, how fast, and most importantly, how likely. We’re not so much concerned about the why.
With options trading, we’re dealing with empirical probabilities. It’s what makes the practice so rewarding but also incredibly risky. If you can handle the heat, below is the game plan on extracting quick alpha from AMD stock.
As stated earlier, options trading focuses on the how of the market, and the most important how is how likely. In mathematical terms, we’re looking for the probability of a particular outcome materializing over a defined time period.
Every options strategy starts with a baseline probability canvas, if you will, and this canvas is functionally crafted by a rise over run equation. For example, to discover the likelihood of AMD stock rising over any given one-week period, you take the number of positive weeks and divide it by the total number of weeks in the dataset. In AMD’s case, the long-side ratio is 55.26%.
Colloquially speaking, a bullish trader at any given moment has a 5.26% advantage over a coin toss. That’s a small but powerful edge. Unless you have compelling evidence to the contrary, you’re better off placing a long-side debit-based wager on AMD stock. Stated differently, you’re incentivized to pay a premium for the right to bet on a particular outcome materializing (i.e., that AMD rises).
Another factor that plays into the optimists’ hands is the baseline performance metric. It’s not just that AMD stock features a 55% long-side success ratio. Instead, when shares rise over that one-week period, the average return is 4.1%. That’s awfully robust, making the semiconductor firm a tempting proposition.
From a market breadth perspective, though, circumstances are even more enticing. In the past two months, AMD stock printed a “6-4-U” sequence: six up weeks, four down weeks, with a net positive trajectory across the 10-week period. Notably, in nearly 57% of cases, the following week’s price action resulted in upside, with a median return of 4.41%.
If the implications of the 6-4-U sequence play out over this coming week, it’s well within reason that AMD stock could reach above $115. Should the bulls continue to maintain control of the market, it could eventually hit $117 to $120.
To be fair, the difference between a long-side success ratio of 55% and 57% is small. Nevertheless, the framework enhances the incentivization profile of AMD stock in that a bullish debit-based approach empirically represents the most feasible approach.
With the above market intelligence, aggressive traders seeking a quick profit may consider the 114/115 bull call spread expiring June 6. This transaction involves buying the $114 call and simultaneously selling the $115 call, for a net debit paid of $37. Should AMD stock rise through the short strike price at expiration, the maximum reward is $63, a payout of over 170%.
Advanced Micro Devices (AMD) Options Chain and Prices
What makes this trade so tempting is the statistical response to the 6-4-U market breadth sequence. Within a one-week period, AMD stock could rise above the $115 mark. If so, that would be enough to trigger the short strike price. Further, the June 6 expiration date would provide an extra week for the forecast to pan out.
Turning to Wall Street, AMD stock has a Moderate Buy consensus rating based on 22 Buys, nine Holds, and zero Sell ratings. The average AMD price target is $126.55, implying 14.72% upside potential.
As circumstances stand, Advanced Micro Devices natively enjoys an upward bias. Essentially, a bullish trader enjoys a 5% edge over a coin toss. Thanks to a specific market breadth sequence, though, this advantage has improved to 7%, along with a bump up in median performance. Taken as a whole, there is an incentive to consider a long-side debit-based options strategy.
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