Advanced Micro Devices (AMD) stock has long been a favorite of option traders and has been in a consolidation phase for the last few months.
One bad thing about AMD stock is that it doesn't pay a dividend. But what if we could use options to manufacture our own dividend?
Does AMD Pay a Dividend?
Let's say I have $15,000 to invest into AMD stock, I could simply buy some shares and hope the stock rises.
But, if I want a more conservative play, I could sell an August 15, 2025 put with a strike price of $150 and set aside the $15,000 in case I am assigned on the short put.
That $150-strike put generates around $2,470 in option premium in just under 12 months.
So, my $15,000 investment into AMD is giving me a 20.33% annualized "dividend".
Risks of the Trade:
Much like owning AMD shares, if the stock drops, I'm going to lose money in the short-term.
If AMD is below $150 in August 2025, then I will be forced to buy 100 shares at $150.
The breakeven price is equal to the strike price less the premium received, which in this case would be $125.30
So if AMD is below $125.30, at expiration the trade loses money.
But, if AMD stays above $150 then I achieve an 20.33% per annum return when the put expires worthless.
Cash secured puts are a bullish strategy but are considered slightly less bullish than owning Advanced Micro Devices stock because the potential gains are limited to the premium received.
The second risk with the trade is that if AMD stock goes on a huge rally, we miss out on any upside. The most we can make is the $2,470 from the option premium.
Greeks and Equivalent Exposure Level
The $150-strike put currently has a delta of 39, so selling this put gives an exposure roughly equivalent to owning 39 shares of AMD stock, although this will change as the stock moves up and down.
It also means the put has a roughly 61% chance of expiring worthless.
One method which can help cut the risk is to turn the trade into a spread and buy a $100-strike put. This turns the trade into a bull put spread and cuts the risk from $15,000 to around $5,000.
There are lots of interesting scenarios you can create with options.
Company Details
Advanced Micro Devices offers the industry's broadest portfolio of leadership high-performance and adaptive processor technologies, combining CPUs, GPUs, FPGAs, Adaptive SoCs and deep software expertise to enable leadership computing platforms for cloud, edge and end devices.
Of the 36 analysts covering AMD, 29 have a Strong Buy rating, 1 has a Moderate Buy rating and 6 have a Hold rating.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster 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.
