Advanced Micro Devices (AMD) stock has long been a favorite of option traders and experiences option volume of around 460,000 contracts per day.
AMD stock recently bounced off the 200-day moving average and put in a bullish candle yesterday.
One bad thing about AMD stock, is that it doesn't pay a dividend. But, what if we could use options to manufacture our own dividend?
AMD Stock Dividend?
Let's say I have roughly $10,000 that I want to invest into AMD stock, I could simply buy some shares and hope the stock rises.
But, if I want a more conservative play, I could sell a September 20, 2024 put with a strike price of $100 and set aside the $10,000 in case I am assigned on the short put.
That $100-strike put generates around $1,430 in option premium in just under 12 months.
So, my $10,000 investment into AMD is giving me a 14.80% annualized "dividend".
What’s The Catch?
Well, much like owning AMD shares, if the stock drops, I'm going to lose money in the short-term.
If AMD is below $100 next September, then I will be forced to buy 100 shares at $100. So if AMD is below $85, at expiration the trade loses money.
But, if AMD stays above $100 then I achieve a 14.80% per annum return when the put expires worthless.
Cash secured puts are a bullish strategy but are considered slightly less bullish than owning AMD stock because the potential gains are limited to the premium received.
The second risk with the trade is that if AMD stock continues to rally, we miss out on any upside. The most we can make is the $1,430 from the option premium.
Greeks and Equivalent Exposure Level
The $100-strike put currently has a delta of 35, so selling this put gives an exposure roughly equivalent to owning 35 shares of AMD stock, although this will change as the stock moves up and down.
One method which can help cut the risk is to turn the trade into a spread and buy a $60-strike put. This turns the trade into a bull put spread and cuts the risk from $10,000 to only $4,000.
There's lots of interesting scenarios you can create with options.
Company Details
Advanced Micro Devices offers the industry's broadest portfolio of leadership high-performance and adaptive processor technologies, combining CPUs, GPUs, FPGAs, Adaptive SoCs and deep software expertise to enable leadership computing platforms for cloud, edge and end devices.
The Barchart Technical Opinion rating is a 8% Buy with a Weakest short term outlook on maintaining the current direction.
Of the 28 analysts following AMD stock, 21 have a Strong Buy rating, 1 has a Moderate Buy rating and 6 have a Hold rating.
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.
On the date of publication, Gavin McMaster 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.
