Exactly two months ago, I wrote an article here about Advanced Micro Devices (AMD), which began like this: “Imagine saying this to yourself in your best sinister voice: ‘It’s a good profit you have with those shares there. It would be a shame if something happened to him.”
So, as always, I wasn’t trying to predict the future. I was trying to hedge the risk of taking risks.
I have invested in every market calamity since the 1987 crisis, and that is enough to make “defense” even more important than “offense” in my book. This applies to my swing trading, long-term investing, and everything in between.
Since that article on August 6 and until this past Friday, October 3, AMD has had something for everyone, except for those who bought it that day and held it until Friday. As shown in this 2-hour price chart, the stock moved 10% in either direction but closed the period roughly flat.
And then we got the big news on Monday.
www.barchart.com
AMD announced that OpenAI will use its chips as part of its huge and historic investment in AI infrastructure. OpenAI even has the option to buy up to 10% of AMD shares under certain conditions. For AMD, this is like being selected by the Wizard of Oz as his business partner.
This has long-term implications or short-term disaster potential. Or both. That’s why, as I described in August, AMD presents itself here as an ideal candidate for the collar. If you own it or if you are thinking about owning it.
The way I see it, if I’m going to buy a stock that skyrocketed in a single day and has a predilection for, let’s say, excitement in both directions, I have two options:
Buy AMD in a smaller size. Less risk (in dollars) means that whatever percentage loss may occur, my dollar loss is smaller.
Buy it, but surround it with an optional collar. As a reminder, that’s where, in addition to buying AMD in “round lots” of multiples of 100 shares, I buy a protective put option to set a firm worst-case scenario over a period of time. And I sell a covered call to help pay for that negative “insurance policy.”
While some are reluctant to sell the covered call, I remind you that last time I checked, if AMD reaches my call strike price, there is no law prohibiting me from buying more shares. To me, that’s a “high class problem,” as we’ll see in this updated collar example below.
First, let’s graph AMD. For me, collaring any stock or ETF is not about that intense options analysis, but about placing the buy and sell strike prices at strategic levels. That’s what helps me do graphic work.
AMD’s daily picture obviously shows that the vault went up on Monday. And while the Percentage Price Oscillator (PPO) indicator at the bottom has yet to break through the proverbial ceiling, I don’t take a single one-day move like this lightly.
www.barchart.com
Especially when the weekly chart shows a possible double top in the $227 area near the stock’s Monday morning open. AMD last saw that territory about 19 months ago. Don’t you think markets have memory? Look at this!
www.barchart.com
The mission here is to see how to access bigger upsides, but “name my price” on the downsides, in terms of how much I can lose on, say, 100 shares of AMD. Its purchase would cost around $20,500. It is worth protecting.
The necklaces are like snowflakes. Many look alike, but all are unique. Each combination of selling exercise, buying exercise, expiration and level of volatility (current and versus the stock’s own history) are variables that can be analyzed. As such, a collar strategy is really as personalized as one wants.
In the case of AMD, late on Monday, this one caught my attention. This configuration of the necklace extends until January 2026, that is, more than 3 months from now.
www.barchart.com
The strike prices turn out to be very clear and round numbers. Put options at $200 and call options at $250. The cost seems reasonable to me, only 3.8%. And that produces a strong upside potential of 18%, compared to just a 6.4% decline. Or almost a 3:1 ratio, which is pretty good for this short maturity period.
This allows the investor to sit back and see what AMD does next, but with a line in the sand to the downside. And with an upside limit of almost 25% above the level at which AMD closed on Monday. It’s like melatonin for the restless investor. And since this stock has demonstrated the ability to move quickly in a day, despite its large size, I think it’s worth considering.
On the date of publication, Rob Isbitts had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
