High Put Premiums on Advanced Micro Devices Stock Make Shorting Them Attractive for Income

Advanced Micro Devices (AMD) stock has run up over 98% YTD, closing at $127.03 on Friday, May 26. AMD stock ended April at $89.37, so it is up 42.1% in May alone. This has also jacked up its out-of-the-money put premiums. As a result, this makes it profitable to sell them short for income investors.

AMD actually had lower earnings last quarter, as I wrote about in my last article on May 3, “Unusual Options Activity In AMD Stock Reflects Recent Lower Q1 Results.” But since then the market has become enamored with all things AI. Advanced Micro is benefitting from that trend.

For example, Nvidia (NVDA) stock, the darling of AI investments, is now up over 172% YTD. They are the leader in AI chips, much further along than Advanced Micro Devices, in terms of market share. 

As CNBC recently reported the surge in AI applications is pushing up demand for GPUs (graphic processing units) in data processing centers, rather than CPUs. That is pushing Nvidia higher since they are the leader in making GPUs. AMD, along with Intel (INTC) are not known for their production of GPUs used in AI applications.

Taking Advantage of Higher Put Premiums

So, for all intents and purposes, AMD stock is getting a free ride on the back of NVDA stock. That means there could be a reckoning sometime in the near future. As a result, its put option premiums have been soaring.

Investors can take advantage of this move higher by shorting these near-term expiration puts. However, there is a risk that the stock could fall and the puts would rise further. So, investors have to be careful here. 

To do this with less risk, it is best to take a near-term expiration period, say three weeks out, as well as a deep out-of-the-money put strike price. For example, the June 16 expiration period, which is 20 days out, has attractive puts worth shorting.

One example is the June 16, 2023, $110 strike price put options. This strike price is over 13.4% below today's price of $127.03. But the puts still trade for $1.12 at the midpoint. That means they provide a 1.02% put option income yield.

AMD Puts - Expiring June 16 - Barchart - As of May 26, 2023

This means that the investor who secures $11,000 in cash and/or margin with the brokerage firm can then short one put contract at the $110 strike price. They do this by entering in an order to “Sell to Open” the $110 strike price put. As a result, the account will immediately receive $112. 

That shows that the $11,000 cash investment produces an immediate $112, a 1.02% yield. Moreover, if the investor can do this each month for a year, the annualized return is over 12%.

This means that AMD stock will have to fall to below $108.88 (i.e., $110-$1.12) before the short-put investor will even begin to have an unrealized loss. They would be forced to purchase the stock at $110 (using the $11,000 in cash already secured), but due to the $112 already received, they would not lose any money unless AMD fell 14.3% from today's price of $127.03.

In fact, some investors might be willing to take on more risk and short the $113 strike price. Those premiums trade for $1.56 per put, giving the investor an immediate premium-to-strike yield of 1.38% (i.e., $1.56/$113.00). And the investor would only have to wait 3 weeks for this trade to expire worthless (i.e., fully profitable).

You can see that these high premiums are attracting huge put volumes. The $110 strike price has had over 18,000 in contracts traded and there are now 5,634 contracts still open. That means many investors believe the stock could fall below $110 on or before June 16. 

But here is the thing that works in favor of the short put investor: the put premiums will likely fall dramatically from here as the expiration period approaches. So, even if the stock falls closer to $110, the put prices may also drop, given the high volatility in the stock. That gives the short put investor at this deep out-of-the-money strike price plenty of time to cover their short, likely at a profit.

That makes shorting these high AMD stock put premiums very attractive to income investors.

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.