Advanced Micro Devices hit resistance and broke below a declining 21-day moving average Wednesday.
Traders who think AMD stock will not reclaim the 21-day line in the next two weeks could look at a bear call spread option trade.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
Wednesday, an AMD bear call spread using the November expiry and the 60-65 strike prices was trading for around $1.50.
Traders Receive $150 Premium
Traders selling the spread would receive $150 in option premium, which is also the maximum possible gain. The maximum loss would be $350.
The spread will achieve the maximum profit if AMD stock closes below 60 on Nov. 18. In that case the entire spread would expire worthless, allowing the trader to keep the $150 option premium.
The maximum loss will occur if AMD closes above 65 on Nov. 18, which would see the premium seller lose $350 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. You always know the worst-case scenario in advance.
Set Stop Loss For AMD Option Trade
A stop loss could be set if the spread value rises from $1.50 to $3.
Because this is a bearish position, traders who think AMD stock could move higher from here should not enter this trade. The position starts with a delta of -21, meaning it is roughly equivalent to being short 21 shares of AMD stock.
According to the IBD Stock Checkup, AMD stock is ranked No. 13 in its industry group and has a Composite Rating of 44, an EPS Rating of 93 and a Relative Strength Rating of 11.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
