President Donald Trump may have just demonstrated a harsh reality of Wall Street. When it comes to the trading discipline, the commonly discussed concepts of bullishness and bearishness mean very little. Instead, market participants should think in terms of deals — there are good deals and there are bad deals, with few in-betweens.
Exhibit A comes courtesy of the Trump administration’s aggressive trade war policies and subsequent U-turn. While the renegade moves certainly keep world leaders on their toes, that may not necessarily be a virtue. After all, business relationships thrive on trust and at least a semblance of predictability. The threat, then, is that key economic partners will grow tired of the shenanigans and thus pivot away.
In such a volatile environment, it’s difficult to align oneself with traditional categorizations of bullish and bearish. Take for example semiconductor giant Advanced Micro Devices (AMD). In one day, AMD stock gained nearly 24% of equity value. Taken outside of any other context, investors would be forgiven for wanting to jump onboard — the fear of missing out or FOMO is powerful.
However, in the trailing five sessions, AMD stock actually lost about 1%. With that in mind, it’s incredibly difficult to label the equity a buy. In fact, the Barchart Technical Opinion still rates shares as a 100% Strong Sell.
In my opinion, it’s not really about whether AMD stock will move higher or not. Instead, it’s about the conviction of the deal.
Look at it this way. Whether you love ‘em or hate ‘em, the Los Angeles Dodgers are going to win a lot of games this year. But are they going to win by an average margin of 20 runs? It doesn’t matter how diehard of a fan you are, you’re not going to take that bet.
It’s the same principle in options trading.
Using the Barchart Options Screener to Find Your Next Deal
One of the most powerful tools within the Barchart arsenal is the Options Screener. Here, you’ll find all the simple and complex strategies — from long straddles to short iron condors — based on a plethora of key parameters. The level of filtration is, in my opinion, unprecedented within the financial publication realm.
Thanks to the Options Screener, it’s incredibly easy to find what I term risk-inverted option spreads. In some cases when broader sentiment is skewed toward one end of the pendulum, opposing trades are effectively given more odds to succeed — an obvious bid by market makers to sweeten the pot. The argument is that, on occasion, the pot becomes too sweet to ignore.
Let’s go back to Advanced Micro Devices. As mentioned earlier, AMD stock popped nearly 24% during the midweek session. Subsequently, sentiment — which was previously dour — is suddenly euphoric. Very few people (relatively speaking) want to take the opposite side of the trade, resulting in risk inversion.
Check out the 101/99 bear put spread for the options chain expiring April 17. In this trade, the short strike price of $99 is 2.23% above Wednesday’s closing price of $96.84. At the same time, the maximum payout for this transaction — should AMD stock “fall” to $99 at expiration — is 48.15%.
That’s a smoking deal that the Barchart Options Screener identified for me — and indeed, it might be too hot to ignore.
In a typical debit spread — whether bullish or bearish — you’re paying a wager on the hopes of a specific outcome materializing. With a bear put spread, the security usually has to fall in value to some downside target.
With the 101/99 spread, this bearish position can rise in value and still qualify for the maximum payout.
Even the Math is in Your Favor
What really drives home the point about AMD stock is the underlying probability of the trade. Barchart notes that the odds for the above transaction being somewhat profitable is 61.1%. This might be understated.
Using AMD’s historical data, we know that on any given week, the chances of a long position being profitable is only 47.79% — a bit worse than a coin toss. In that regard, the bears have an edge to begin with but that’s not the reason why the bear put spread is so compelling.
Rather, the question isn’t about the odds of AMD rising or falling in a one-week period but its ability to pop 2.23%. Remember, that’s the margin of safety to the short strike price. Under this context, the odds of success for the bear put is arguably 63.47%.
What’s more, the gap to breakeven for the aforementioned trade is 2.9%. This metric improves the bearish trader’s actual probability of profit to 66.67%.
In other words, market makers are giving you the reward for taking a 61/39 wager when the actual odds may be 67/33 in your favor. That’s what I call a good deal.
