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Advanced Micro Devices (AMD) stock is up over 87% YTD, including a rise of 19% in the last month alone. However, as of June 16 AMD stock is at $120.08, up just $1.87 or 1.58% since May 31 when it closed at $118.21. However, based on average analyst earnings estimates, the stock may have much further to go. That is good news for investors who short out-of-the-money (OTM) put options for income plays.
In fact, we discussed this trade last month on May 28, “High Put Premiums On Advanced Micro Devices Stock Make Shorting Them Attractive For Income.” At the time we discussed shorting the $110 strike price puts expiring on June 16 for $1.12 premium and shorting the $113 strike price puts for $1.56.
Both trades have been extremely profitable since AMD stock closed at $120.08 and the put options expired worthless. That means the investor kept all of the proceeds from the 3-week trade. In addition, had no obligation to purchase the stock at either $110 or $113.00.
Given that the stock does not appear overvalued at this point (see below) it makes sense to repeat the same trade in a new 3-week short expiration period.
AMD Stock May Still Be Undervalued
One reason the stock could have further to go is that analysts still have reasonably high price targets. For example, Morningstar's analyst says that his price target is now $130 per share. This is based on the “firm’s significant growth opportunity ahead as it capitalizes on favorable trends in data centers, artificial intelligence, and gaming.”
Moreover, the average annual P/E (price/earnings) forward multiple for the last 5 years has been 38.5x according to Morningstar data. This is higher than the average of the 2023 41.7x multiple and the 28.3 multiple for 2024 based on Seeking Alpha's survey of analysts' forecasts. That average is 35x, making it clear that the 38.5 average from Morningstar implies AMD stock could rise at least 10% from here (i.e., $38.5/35 = 1.10).
Moreover, Seeking Alpha indicates that the 5-year forward multiple has been 42.73x. That implies that AMD stock could rise 22% from here (i.e., 42.73x/35x = 1.22). The bottom line is that AMD stock could still rise from here over the next year even if it were to stay in line with its historical average multiples.
Shorting OTM AMD Put Options for Income
As mentioned above, it might make sense to short AMD puts for 3 weeks out, or that expire on July 7, 2023. For example, the $113 strike price put trades for $1.82 per put contract and the $115 strike price put is at an amazing $2.49 premium.
This means that the $113 strike price cash-secured short put investor will make 1.61% (i.e., $1.82/$113 = 0.161) immediately with a strike price that is almost 6% below today's price. The $115 strike price short put investor will make 2.165% (i.e., $2.49/$115).
For example, assuming an investor secures $11,300 (i.e., 100 shares x $113) with their brokerage firm, they can enter an order to “Sell to Open” one 1 put contract at $113. The account will immediately make $182.00. That is why the immediate yield is 1.61% (i.e., $182/$11,300). Moreover, if the investor can do this every three weeks for a year, the annualized return is 27.9%, since there are 17.33 periods of 3 weeks in a year (i.e., 17.33 x 1.61% = 27.9%).
And, in addition, an investor who secures just $11,500 with their brokerage firm can make $249.00 immediately. That works to an immediate yield of 2.165% or 37.5% if done every three weeks for a year.
Moreover, keep in mind that if AMD stock falls to $115 or $113 on or before July 7, the investor's secured cash will be used to automatically purchase 100 shares of AMD stock. But at least the overall breakeven dollar points are still well below today's price. Nevertheless, at that point, the investor may or may not have an unrealized loss by purchasing AMD stock.
But all is not lost. For one, this exercised purchase may actually lower the investor's ongoing cost in the stock. Moreover, the investor can turn the situation around and sell out-of-the-money calls on a three-week basis. That will bring in more income that could allow them to allow the trade to become profitable, despite the unrealized capital loss.
The bottom line is that AMD puts that are out-of-the-money look like a good investment, especially since AMD stock may have further to rise.
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.
