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Traders are piling into out-of-the-money (OTM) put options of Advanced Micro Devices (AMD) stock. This comes from Barchart's Unusual Stock Options Report today. It is actually a bullish sign as traders shorting these puts believe that the stock won't likely fall to this OTM strike price.
The Report comes after Advanced Micro Devices just reported its Q2 results on Aug. 1. The results were somewhat disappointing. Revenue was flat from the prior quarter and down 18.3% from a year ago.
Moreover, its free cash flow (FCF) was lower at $254 million compared to $328 million in the prior quarter and $906 million a year ago.
As a result, AMD stock is down today about $7 from its prior price and is trading below $110 in morning trading on Aug. 10 ($109.91), down from $117.60 the day before.
Put Trading Soars
The Barchart Report shows that there were over 2300 put options contracts traded at the $97 strike price. They had an average price of $1.58 for the period ending Sept. 8.
This period is 37 days from now and the strike price is well below today's spot price, almost $13 out-of-the-money from $109.91, or 11.75% below it.
As a result, it seems clear that much of that volume could be from short sellers who are trying to take advantage of the bearish sentiment in AMD stock. For example, by selling short these puts, with just over one month until expiration, the traders can make an immediate yield of 1.623% (i.e., $1.58/$97.00 strike price).
That means that if the trader can repeat this 12 times a year, the annualized return will be about 20% (19.55%). That is a very good use of capital, especially since the OTM width is very high.
For example, AMD stock would have to fall to $95.42 (i.e., $97-$1.58), or over 13% before the trader has any kind of unrealized loss.
Contrarian Play
Granted, there is a lot to be upset about with the AMD results, as pointed out above. Moreover, the company gave a tepid outlook, given the slowdown in PC markets.
For example, management projected that Q3 revenue would be just 2.5% higher on a Y/Y basis. In addition, it projected a modest increase in its operating expenses. That essentially means that free cash flow might not really recover.
Moreover, the company seems to have paused its share buyback program, as no stock repurchases were made during the quarter.
However, some feel that AMD stock could still have further to go. As a result, those shorting these OTM puts can be seen as a bullish sign. In effect, it is a contrarian play.
For example, analysts still project significantly higher earnings for the year ending Dec. 2024. Based on analysis and surveys at Seeking Alpha, AMD stock is trading at 42.6x earnings this year and just 27.9x for next year.
This is significantly lower than AMD's average P/E multiple for the past five years. Morningstar shows that its average has been 38.5x, well over the 27.9x multiple for 2024.
As a result, shorting these OTM puts could be a good long-term play, even if AMD stock endures some short-term weakness for the time being.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
