Advanced Micro Devices is a highly ranked stock showing good technical traits and relative strength.
AMD stock is above upward sloping 21-, 50- and 200-day moving averages. However, after an impressive run, I'm thinking it might pause around current levels.
A calendar spread is an income trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Usually, this is done with monthly options, but it can also be done with weekly options.
Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
Setting Up Calendar Spread On AMD Stock
In today's example, we'll look at a calendar spread trade on AMD stock.
With Advanced Micro Devices trading around 120, setting up a calendar spread at 120 gives the trade a neutral outlook.
Selling the Dec. 15 call option with a strike price of 120 will generate around $600 in premium, and buying the Jan. 19, 120 call will cost approximately $860.
That results in a net cost for the trade of $260 per spread. That is the most the trade can lose.
The estimated maximum profit is $370, but that could vary depending on changes in implied volatility.
The idea with the trade is that if AMD stock remains around 120 for the next few weeks, the sold option will decay faster than the bought option. That would allow the trade to be closed for a profit.
The break-even prices for the trade are estimated at around 111 and 131, but these can also change slightly depending on changes in implied volatility.
Set Up Profit Target For AMD Stock Trade
For this reason, calendar spreads are considered a more advanced strategy and not recommended for beginners.
For a trade like this, I would set a profit target of 30%, and I would set a stop loss if AMD stock breaks through either 111 or 131.
Calendar spreads are a neutral option trading strategy. Bullish traders might consider something simpler like a bull put spread, like Tuesday's example on Monday.com.
AMD stock is ranked No. 3 in its industry group and has a Composite Rating of 96, an EPS Rating of 81 and a Relative Strength Rating of 94.
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
