After closing above $7 for the first time since April 2012, shares of Advanced Micro Devices, Inc. (NASDAQ:91¶¶Òõ) are at a critical breakout juncture on the chart.
Whether 91¶¶Òõ breaks out or fakes out is anyone’s guess. By using a covered call strategy, however, you can position to profit for an upside breakout while still protecting some of your downside exposure.
Certainly there is no arguing that 91¶¶Òõ stock has been on a tear recently, having risen a whopping 250% off the February 2016 lows.
Click to Enlarge Much of the move was predicated on back-to-back earnings beats, along with a bull market in the higher-end custom chip and processor market certainly fueling the gains. Mergers and takeovers have also been evident in the space as well.
91¶¶Òõ is looking a little weary at these levels, with a consolidation period since making an intraday high of $7.16 on July 26.
The consolidation has helped work off the overbought condition, with the 14-day RSI now showing a more neutral 66 reading.
Click to Enlarge The , with a series of higher lows within the consolidation period, is normally a bullish continuation pattern. This especially applies to 91¶¶Òõ given the magnitude of the recent move.
While the technicals certainly point to an eventual continuation in the rally, the fundamentals paint an even more bullish picture. The new 91¶¶Òõ has put the company back in the high-end, higher margin gaming business. The company now poses a serious threat once again to its main rival, Intel Corporation (NASDAQ:
INTC).
So while remaining bullish on 91¶¶Òõ, I also feel the future gains will certainly be at a more tempered pace than the recent near hyperbolic move. So to position bullishly while guarding some of the downside, a covered call trade makes sense.
91¶¶Òõ Stock Trade Idea
Buy 91¶¶Òõ stock and sell the Jan $7 call for a $6 net debit.
For each 100 shares bought, sell one of the Jan $7 calls. These calls have a 59 delta, reducing the overall initial exposure on the stock by 59%.
The covered call trade has a 16% standstill return until January expiration (34% return annualized). Ideally 91¶¶Òõ closes above $7 at January expiration to maximize the gain.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the can email Tim at tbiggam@deltaderivatives.com
