Advanced Micro Devices (AMD) may be among the top semiconductor companies in the AI era, and AMD stock has doubled in value over the past 52 weeks. However, the stock has had an unusually poor start to the year, losing about 7%. Adding to some skepticism, the Barchart Technical Sentiment Indicator rates AMD a 24% Weak Sell.
Fundamentally, much of the concern appears to be tied to growing anxiety of an AI bubble. Furthermore, while machine learning has accelerated productivity across the board, there are also concerns that most of the recent economic gains have been concentrated in a few elite technology companies. With such an imbalanced mix of sectors involved in the wealth creation story, the threat of a bubble bursting becomes more important.
It may be no coincidence, then, that the options market has been lighting up, especially for popular names like AMD stock. A noteworthy statistic to consider is options flow, which focuses exclusively on large block transactions likely made by institutional investors.
In the second half of February, options flow became noticeably bearish, with several trades showing possible bearish intent. For example, on February 19, net trading sentiment fell to nearly $160 million below parity, with total gross bearish volume reaching $201.83 million in the red. Additionally, the last four trading days of February saw negative net trading, with the majority of trades representing debit-based puts.
With debits, a trader pays that premium, giving him the right to speculate on a directional outcome. So for puts to be profitable, AMD stock must fall to a defined threshold; Otherwise, the debit is likely to be lost.
Unless the smart money is in the business of wasting capital, the flow of negative options appears to represent a subtle sign that professionals are becoming more cautious about AMD stock.
Perhaps the biggest clue about Advanced Micro Devices stock comes from the volatility bias. By definition, skew identifies the implied volatility (IV), or a stock’s potential range of movement, across the entire strike price spectrum of a given options chain. Colloquially, skew provides a visual representation of the surface distortion of the volatility space, allowing retail traders to understand how smart money is structured against risk.
In the case of the March 20 expiration date, the slope near the spot price is relatively flat, suggesting a lack of urgency to protect against the everyday rumors that can occur for a security like AMD stock. However, towards the left limits (i.e. towards the lower bearings), the inclination slopes noticeably upward.
This setup suggests that, in a controlled sense, traders recognize that the downside tail risk is non-trivial and are therefore willing to pay a small additional premium for protection.
Now, let’s be clear: No one seems to be covering the panic over AMD stock. If so, the bias would show much more pronounced kinks due to the greater demand for protection. But what is really significant is the bias on the right limits (towards higher strikes). You will notice that neither the buy nor the sell IV increases much beyond the current spot price.
In my opinion, this circumstance represents information by omission. While you are paying modest protection against downside tail risk, the same cannot be said for upside risk. Put another way, from a smart money perspective, the magnitude of the risk of not protecting against volatility is perceived as greater than the magnitude of the reward of not positioning for upside convexity.
That sounded much softer in my head than when I actually wrote those words. In the simplest sense, options traders focus more on not losing than on directly winning. It is this subtle thoughtfulness that makes me think that a bearish spread might be in order.
I’m not going to say that Advanced Micro Devices stock is a long-term bearish trade. If we look at the monthly options chain below (the one expiring on April 17), the volatility bias shows an upward curve at the right-hand limits (particularly for the IV call). In the long term, the smart money seems to believe that the semiconductor company will emerge from its crisis.
However, in the immediate term there could be some turbulence. For those who really want to make a bold bet, the bearish 200/195 put spread expiring on March 20 could be interesting. Basically, you would be looking for AMD stock to fall above the $195 strike price at expiration. If so, the maximum payout would be slightly higher than 104%.
Based on the IV and days to expiration, the expected movement calculator anticipates a spread between $182.57 and $217.85. From this framework, the $195 target is theoretically within a realistic range. Most significantly, the smart money appears to be hedging its bets, making a bearish selling strategy potentially relevant.
On the date of publication, Josh Enomoto 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
