Advanced Micro Devices sports a 99 Composite Rating on IBD Stock Checkup. It's helped IBD's fabless semiconductor industry group rank jump into the top 10 industries among 197 tracked. Thus, we'll investigate a long call spread trade in AMD stock.
AMD stock is holding up well despite a drop of more than 2% for the week. The action follows a spirited 28% run over the prior four weeks.
Active traders and investors are pushing prices in the broad indexes to all-time highs. This is taking place after a new reading on U.S. consumer prices that in effect created, what I suspect, another group of bears picking the top and getting stopped out of the market.
Stock prices higher still appear more favorable in the overall bullish context of the market. The take-away remains. Wait for pullbacks to go long and stay within groups that have favorable market views.
I remain concerned with copper making fresh multimonth lows in the futures market. Nonetheless, dancing with the top stocks that have brought us to this stage in the market, I'm headed to AMD stock for a calendar spread trade in options. Why? I'm getting into a long position with less risk.
AMD Stock: The Trade Setup
The long call calendar spread is a neutral to bullish position. It estimates that prices in shares, including AMD stock, will rise over the longer term to deliver stellar results. We can take advantage of any dips in the market to position in the stock of our choice while holding on to the position through any big spikes in price.
Investor's Corner: How To Use The Composite Rating To Gain An Edge
Let's set up a long call calendar spread for AMD stock this way:
- Sell to open 1 AMD May 17-expiration call with a 170 strike price
- Buy to open 1 AMD June 21 170 call
Total debit of $2.50 per set of contracts, based on recent trading, places the break-even cost at 172.50. Find this by taking the price of the first long option strike plus the cost of the option.
The ideal strategy result gives us four choices to exit the trade. One, sell the entire calendar spread in AMD stock once it carries an acceptable profit. Two, sell the entire calendar spread once it hits your loss threshold as determined by personal risk.
Three, sell the entire spread with a swift upward price by AMD stock right after entering the trade, especially when you have more than two weeks to expiration of the June strike option. And four, allow the short call strike of the calendar to expire worthless. Then determine if you would like to create a new spread by selling another call against the June 170 call at a higher price.
Do this to turn the June event into a long call spread, which will limit potential upside.
Understanding The Long Call Calendar Spread
The goal of taking the calendar trade is to gain exposure to profit but to significantly limit loss if we are incorrect.
Options sellers are positioned to win in two ways — the stock does nothing, or the stock moves within the ranges relative to the strategy, so we use this concept to minimize the risk of market exposure.
Let's now identify key chart levels. The monthly resistance zone in AMD stock sits near 180. Support sits near 160.
If we see some sharp dips, we will be able to consider adding to the position as long as market indicators show increased probabilities of more upside. This will increase your risk, so think this through. Be patient in the current flow and realize that there are some macro events that could result in volatility.
Trade Management In AMD Stock
Be sure to consider the potential scenarios:
- With earnings behind us, we now expect the charts to range higher and does not break 160 for more than three days. AMD stock shows itself as favorable to traders looking for longer term growth. We should look for bounces in the days following to confirm the strength of the chart.
- AMD stock grinds higher much earlier in the cycle and the option position increases in value by more than 100%. We could certainly choose to sell the entire position, freeing up more capital to trade.
- Stock grinds higher and tests or breaches 180 but immediately retreats. This suggests traders are not willing to pay more for the stock at the present time. This is ideal if it occurs in the near term and into the February expiration strike.
- AMD stock breaks down on volume for more than three days. It breaks our personal risk thresholds for the trade; we exit the position.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully. Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
