This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.
Several analysts expect AMD to continue pushing higher. The following two articles provide offer compelling reasons as to why – Is Advanced Micro Devices Finally Ready to Break Out? and 3 Reasons AMD Stock Is a Buy Right Now.
AMD has been consolidating sideways since mid-April and appears poised for an upside breakout. Buyers have been defending the lower end of the range near support at $50 while sellers have capped gains at a trendline that originates from the peak posted in February. Consolidations typically break in the direction of the broader trend and this particular stock has had a strong bullish trend for more than four years. Unlike other stocks that are appealing to investors right now, AMD does not show signs of being overbought on a daily timeframe which reduces the chances of a sharp near-term retracement. In terms of support, the 20 and 50-day moving averages have converged towards each other to offer a floor at $53.50.
If you agree there’s further upside ahead for AMD, consider this trade which is a bet that the stock will continue to advance over the next five weeks, or at least not decline very much.
Buy To Open AMD 14AUG20 50 Puts (AMD200814P50)
Sell To Open AMD 14AUG20 55 Puts (AMD200814P55) for a credit of $2.01 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when AMD was trading near $56. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will only be $1.30 per spread. Each contract would then yield $199.70 and your broker would charge a $500 maintenance fee, making your investment $300.30 ($500 – $199.70). If AMD closes at any price above $55 on August 14, both options would expire worthless, and your return on the spread would be 67% (764% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run. Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.
As with all investments, you should only make option trades with money that you can truly afford to lose.