Stocks of the semiconductor group Advanced Micro Devices (NASDAQ:) hit a record high of $110.52 on Aug. 3. This year AMD stock is up about 18% and in the past 52 weeks, it has bounced back more than 29%.
The 52 week range was $72.50 – $110.52 and the market capitalization (cap) is $133 billion. In comparison, the market caps of several other leading chip giants are:
Intel (NASDAQ:) – approximately $218 billion;
Micron Technology (NASDAQ:) – $89 billion;
NVIDIA (NASDAQ:) – $494 billion;
Taiwan Semiconductor (NYSE:) – $607 billion;
Texas Instruments (NASDAQ:) – $174 billion.
The recent catalyst for AMD stock price gains has been the robust second quarter announced on July 27. Revenue was $3.85 billion, nearly doubling from $1.932 billion a year ago. The company reports revenues in two main segments: Computing and Graphics ($2.25 billion revenue, up 65% year-over-year, YOY, due to higher customer and graphics processor sales)
Enterprise, Embedded and Semi-Custom (earnings of $1.60 billion, up 183% year-over-year, driven by higher revenues from EPYC processors and sales of semi-custom products).
Non-GAAP net income of $778 million translated into earnings of 63 cents per diluted share. A year ago, the respective numbers were $216 million and 18 cents. Free cash flow was a record $888 million, up from $152 million in the second quarter of 2020.
Regarding the results, CEO Lisa Su quoted:
“We are growing significantly faster than the market with strong demand across all our businesses. We now expect our 2021 annual revenue to grow approximately 60 percent year-over-year, driven by strong execution and increased customer preference for our industry-leading products."
Analysts noted the chip group's improved performance in the data center market. Investors were pleased that operating margin doubled and YOY profitability more than tripled. In addition, the company downplayed the current chip shortage. Prior to the release of the results, AMD's stock fluctuated between $90 and $91. Now, as we write Tuesday afternoon, it's $109.76. That's a return of more than 20% in a week.
Next step in AMD Stock?
Among 38 analysts surveyed via Investing.com, AMD stocks have a ' ;outperform' rating, with a 12-month average price target of $111.73. The target range is between $74 and $169.70. In other words, given the recent price hike, AMD stocks could quickly become jerky and give up some of its recent gains before potentially hitting new highs. long-term portfolios, especially when short-term profit-taking. However, investing in 100 shares of Advanced Micro Devices stock would cost about $10,976, a significant investment for most people. Therefore, some investors may prefer to put together a "poor person's covered call" on the stock instead. limited. Such a strategy could be used to replicate a covered call position at a significantly lower cost. Investors new to options may want to review our previous articles on LEAPS options (for example, here and here) before reading on. with a lower exercise price. At the same time, the trader sells a "shorter term" call with a higher strike price, creating a long diagonal spread.
The call options for the underlying shares therefore have different strikes and different expiration dates. The trader goes long for one option and short for the other to create a diagonal spread. In this strategy, both the profit potential and the risk are limited. The trader determines the position for a net depreciation (or expense). The net depreciation represents the maximum loss.
Most traders adopting such a strategy would be slightly optimistic about the underlying security – here, Advanced Micro Devices. Instead of buying 100 shares of AMD, the trader would buy a deep-in-the-money LEAPS call option, with that LEAPS call acting as a "surrogate" for owning the shares. this strategy allows the trader to buy a deep in-the-money (ITM) LEAPS call, such as the AMD January 20, 2023 80 strike call option. This option is currently offered for $37.72. It would cost the trader $3,772 to own this call option that expires in almost a year and a half instead of $10,976 to buy the 100 shares outright.
The delta of this option is close to 80. Delta shows the amount the price of an option is expected to move based on a $1 change in the underlying asset.
If AMD shares rise $1 to $110.76, the current $37.72 option price is expected to rise about 80 cents, based on a delta of 80.
The actual change, however, may be slightly more or less depending on several other factors beyond the scope of this article.
For the second part of this strategy, the trader sells an out-of-the-money ( OTM) short-term call, such as the AMD October 15, 2021 120 strike call option. The current premium of this option is $4.43. The option seller would receive $443 excluding trading commissions.
There are two expiry dates in the strategy, making it quite difficult to give an exact formula for a break-even point in this trade. Several brokers may offer "profit and loss calculators" for such a trading setup.
Calculating the value of the option for the back month (i.e. LEAPS call) when the first month (i.e. the shorter month) dated) call option expires requires a pricing model to get an "estimate" to get a break-even point. strike price of the short call at maturity. So the trader wants the AMD stock price to stay as close as possible to the strike price of the short option (i.e. $120 here) on expiration (October 15, 2021), without going above it.
Here the maximum return would, in theory, be about $1,196 at a price of $120 at expiration, excluding trading commissions and fees. (We arrived at this value using an options profit and loss calculator). Without the use of such a calculator, we could also get an estimated dollar value. Let's see:
The option seller (i.e. the trader) received $443 for the option sold. Meanwhile, underlying AMD stock rose to $120.00 from $109.76. This is a difference of $10.24 per AMD share, or $1,024 for 100 shares. Since the delta of the long LEAPS option is taken as 80, the value of the long option will theoretically increase by $1,024. X 0.8 = $819.20 (In practice, however, it can be more or less than this value.)
The total of $443 and $819.20 comes to $1,262.20. Although it is not the same as $1,194, we can consider it an acceptable estimated value.
It is understandable that if the strike price of our long option had been different (ie not $80.00), the delta would have been different too. Then we need to use that delta value to arrive at the estimated final profit or loss value.
Here, the trader's potential returns are exploited by not investing $10,976 in 100 shares of AMD initially.
]Ideally, the trader hopes the short call expires out-of-the-money. The trader can then sell call after call until the long LEAPS call expires in about a year and a half.
Bottom Line
Active position management diagonal debit spread is usually more difficult for novice traders. If AMD is above $120 on October 15, the position will return less than its potential maximum return as the short-term option begins to lose money.
Then the trader may feel the need to close the trade early as the price skyrockets and the short talk is caught deep ITM.
In the coming weeks we will continue our discussion with several examples of option strategies.
