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Advanced Micro Devices Inc (AMD) stock has had a large number of in-the-money put options traded today along with a large call option tranche. This could be from bullish investors who are hedging their bets on their AMD shares.
Or it could be from bearish investors who see that AMD stock is at a peak, believing it is due for a drop.
This action can be seen in Barchart's Unusual Stock Options Activity Report today. They indicate that many of these trades have had large volumes. They range from 42 to 63 times the option contracts that previously were outstanding at the strike prices of each tranche.
For example, there were over 22,400 put contracts traded at the $138 strike price. Since AMD stock is trading at $137.19 these contracts are already in-the-money (ITM). That means that whoever buys these puts will expect that the puts will be exercised.
The price of the puts was $2.37 per put, so the breakeven level is $138-$2.37, or $135.63. So, for the put option buyers of these contracts to make money, AMD stock has to fall another $1.56 before reaching breakeven.
It is likely that a good portion of the AMD put option buyers may already be shareholders who are long AMD stock. They may be hedging their bets in case AMD stock falls further.
Note in the table above that all of the put contracts are ITM. That could also indicate that many of the put buyers are negative on the stock, at least in the short term.
One reason for this could be that AMD stock has recently risen and appears to be at a peak price. This can be seen in the Barchart chart below.
It shows that AMD stock has risen from a recent low of $93.66 at the end of October (Oct. 26). It's now up over 46% in the past month and a half. That means that many traders may believe that the stock could cool, at least for the time being. That may also be a reason why there are so many put contracts being traded today, especially ones that are in the money.
So, what is going on with AMD that may have prompted this rise? Is it sustainable?
AMD Generates Large Free Cash Flow in Q3
Advanced Micro Devices produced strong revenue and earnings during Q3. Revenue was up 4% year-over-year (YoY) and 8% higher QoQ. Moreover, its earnings per share was 18 cents, compared to just 4 cents a year ago and just 2 cents last quarter.
In addition, the company said its free cash flow (FCF) was $297 million for the quarter. That works out to 5.1% of its Q3 revenue of $5.8 billion.
However, that FCF margin is paltry compared to Nvidia Corp's 38.8% Q3 FCF margin. I discussed this in my recent article on NVDA stock, “Nvidia Stock Is Off Its Highs but Has Huge Upside - Ideal for Put Option Short Sellers.”
I argued that even though NVDA stock was at a peak, it could go much higher based on its huge FCF.
This might not be the case with AMD stock unless it can significantly increase its FCF and FCF margins. That could be another reason why AMD stock is due for a hit, as put option buyers seem to believe.
The bottom line here is that investors might want to be careful with AMD stock. The huge volume in its near-term put options could bring additional pressure on a drop in the stock in the near term.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
