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Advanced Micro Devices (AMD) stock options activity is up today, according to Barchart's Unusual Stock Options Activity Report. Yesterday AMD released lower Q1 earnings and FCF vs. last year. As a result, AMD stock is down over 8% today to about $82.22 per share.
In fact, AMD actually beat investor revenue and earnings expectations, despite significantly lower results compared to the prior-year quarter. For example, the company said adjusted earnings per share (EPS) was 60 cents, which was 4 cents better than analysts forecast, according to Seeking Alpha. However, in Q1 2022 EPS was $1.13, showing a 47% drop in earnings per share.
In addition, revenue was $5.35 billion, beating expectations by $44.4 million, although it was down 9% from the prior-year quarter.
Unusual Call Options Activity
As a result, Barchart now reports that there has been huge unusual call option activity in AMD stock. Most of the options activity is for next expiration this Friday, although one tranche is for next week, as can be seen in the Barchart Report below.
This means that investors are taking short-term bets on the direction of the stock. For those that below that today's stock price dip is temporary they are willing to pay high premiums. For example, the $83.00 strike price calls for May 5 are trading for $1.09 at the midpoint. That means that the stock has to rise to at least $84.09 (i.e., $83.00 +$1.09), or 2.27% higher than today's price of $82.22. These investors may be willing to pay that price, as it may not seem a high hurdle to them.
For example, they may see the AMD multiple of over 30x earnings, as seen by 2023 forecasts of $2.91 per share this year, is not very high.
In addition, it may be that many institutional investors are simply selling covered calls on their large holdings. That means that they don't necessarily expect the stock to rise over $83.00 to $85 per share (strike prices with high activity seen above). They are happy to collect the premiums on a near-term basis.
However, this strategy comes with a high risk that AMD stock could rebound before the expiration period of this Friday. In that case, their shares could be called away at the strike prices seen above.
Most investors might want to be a little more careful than this. It is always better to buy calls and even sell covered calls at slightly higher strike prices with more time than just a few days to expiration. That way there is room for the high volatility in the underlying stock to play out.
For example, call options expiring on May 26 at $88.00 per share trade for $1.40 per call contract. In addition, the $90.00 call prices are at 96 cents per call option. That provides a covered call yield of 1.7% for the $88.00 strike price calls (i.e. $1.40/$82.22), and 1.09% for the $90.00 call strike price (i.e., $0.96/$82.22).
These strike prices are over 7% and 9% higher than today's price, and so provide good upside protection for investors selling covered calls. Either way, AMD option premiums show huge income opportunities for existing long investors in the stock, as they wait for the stock to rebound.
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.
