Advanced Micro Devices is showing elevated implied volatility, with an IV percentile reading of 66%.
That means the current level of implied volatility is higher than 66% of other occurrences in the last 12 months.
When volatility is high, it can be a great time to look at option selling strategies like credit spreads.
Today, we're looking at an option credit spread called a bull put spread. As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
Trade Works With Move Up, Sideways Or Even Down
This type of trade will profit if AMD stock trades sideways or higher, and even sometimes if it trades slightly lower.
With AMD stock trading around 110, if we use the November expiration, we can sell a 90 put and buy an 85 put for around $0.80.
Selling this spread would generate roughly $80 in premium with a maximum risk of $420.
If the spread expires worthless, that would be a 19% return in six weeks — provided AMD stock is above 90 at expiration.
The maximum loss would occur if AMD stock closes below 85 on Nov. 17. That would see the premium seller lose $420 on the trade.
The break-even point for the trade is 89.20. That's calculated as 90 less the $0.80 option premium per contract.
Setting Stop Loss On Option Trade
I would set a stop loss if AMD drops below 95. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be 80.
Sticking to this stop-loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, AMD stock is ranked No. 6 in its group and has a Composite Rating of 86, an EPS Rating of 67 and a Relative Strength Rating of 93.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
