Intel Envies Advanced Micro Devices
The last time I wrote about Advanced Micro Devices, Inc. (NASDAQ:AMD), I suggested that the stock was showing bullish signals on the chart and could take out $10.00. A move by AMD stock to the $14.00–$15.00 chart level could be in the works for 2017.
The surge in AMD stock was driven by a report that suggested chief rival Intel Corporation (NASDAQ:INTC) would license “AMD Radeon” GPUs for use in its next-generation CPU chips.
The news is massive for AMD stock since it helps to confirm the potential of its super-fast and powerful GPU chips code-named “Ryzen” and “Vega.”
These GPU graphics processor chips have been known for the power requirements of the intensive gaming segment, but the chips are now also being used for the rapidly growing artificial intelligence (AI) and machine learning applications.
Unlike CPU chips, GPU chips are more powerful and are ideal for running multiple operations at the same time. This has been its strength in the gaming sector, and now other applications like AI that demand power and speed.
Advanced Micro Devices, Inc. appears to have found an excellent market that is accelerating in demand to help offset the slowing in the personal computer (PC) chip market.
A deal with Intel would confirm the strong potential for the GPU chips.
Advanced Micro Devices, Inc. already has supply deals for its GPU chip with the likes of Alphabet Inc. (NASDAQ:GOOG) and Alibaba Group Holding Ltd (NYSE:BABA).
AMD stock has had an amazing run so far, up a staggering 308% year-to-date. The stock now looks a bit stretched in the short term as traders digest the rapid gains.
Chart courtesy of StockCharts.com
AMD Could Retrench Back to $10
As an investor, there are likely concerns that the share price of Advanced Micro Devices, Inc. is overextended. We could see AMD stock eventually move toward $14.00 but, in the meantime, there could be some overbought selling pressure that could drive AMD stock back down toward the longer-term support resistance level at $10.00.
A trader can manage the risk via call options or call spreads, just in case AMD stock does retrench after the excitement phase.
Now, for example, if a trader believes that AMD stock could retest support at $10.00, the trader has two lines of attack.
- Wait for price weakness in Advanced Micro Devices stock, or
- Sell Put Options on AMD stock to establish a lower entry price while generating some premium income to lower the adjusted cost base if the trader is called away.
Here’s a hypothetical scenario: a trader who believes that AMD stock could fall back to $10.00 could sell the AMD put, with a $10.00 strike expiring in July 2017 for the current $1.36, or $136.00 per contract. At $10.00, assuming the trader is called away and required to buy AMD stock at $10.00, the trader’s adjusted cost base would be $8.64 after discounting the premium.
Of course, if AMD stock holds at above $10.00 by the July 2017 expiry, the option expires worthless and the trader retains the premium.