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Are semiconductor stocks like Advanced Micro Devices (AMD) too hot to handle? That’s the question posed by Barchart content partner Zacks Investment Research. It’s a fair inquiry. Although no one will deny the enormous upside potential of artificial intelligence and other innovations, the sector has been booming. Therefore, a correction in AMD stock and other high-profile assets wouldn’t be the most shocking development.
On the other hand, there’s an argument to be made that the train can keep on chugging forward. For example, semiconductor juggernaut Nvidia (NVDA) appears overvalued relative to forward earnings. However, the company’s price/earnings-to-growth (PEG) ratio sits at only 1.16, per Zacks. With a PEG of under 1 representing a mixture of value and potential growth, NVDA may still have legs.
If that’s the case, AMD stock could also march higher and that appears to be the consensus. Wall Street pegs the tech enterprise as a Strong Buy, with the worst ratings being six Holds. Nevertheless, investors have reason to be cautious. Last week, shares plunged almost 7%.
Essentially, the only certainty is that AMD stock will move — it’s likely not going to stay static. But so long as you’re willing to gamble that shares will stay within defined parameters, a short iron condor could be a tempting proposition.
Setting Up the Condor Trade for AMD Stock
A short iron condor is a multi-leg options trade. Specifically, there are four transactions which effectively act as a combination of a bull put spread and bear call spread. The structure of this condor is as follows:
- Sell a put at the lowest defined strike price.
- Buy a put at a higher strike price to cap off the risk.
- Buy a call at a higher strike than the bought put.
- Sell a call at the highest defined strike price.
Think of the short iron condor as a plane flying into a tunnel in the context of a two-dimensional side-scrolling video game: you can’t go too high nor can you go too low. Because there are two ways to crash, the iron condor is super risky. Simultaneously, it can be quite lucrative if you’re confident that shares will stay inside the tunnel’s boundaries: the upper breakeven threshold between the call strikes and the lower breakeven between the put strikes.
Now, one of the biggest reasons why retail traders avoid the iron condor is the complexity. I’m not necessarily talking about the four individual transactions but rather, manually sifting through various bid/ask spread permutations to find a list of viable ideas. That’s a nightmare, which is why you need Barchart Premier.
Within seconds, you can pull up a list of all mathematically rational trade ideas by hitting the “Condor Strategies” section on the left-side menu bar of the target security’s Price Overview page.
Since we don’t want to expose ourselves to excessive share price movement, we’ll look at the options chain expiring this coming Friday, Oct. 25. Next, we’ll do some stochastic analysis to determine a baseline strategy. That’s the technical term to describe the process of calculating projected price movements based off implied volatility (IV):
- Take the price of AMD stock, which closed at $155.97 on Friday.
- Calculate the square root of the number of days till expiration (six calendar days, in this case) divided by 365 (days in a year).
- Take note of the specific IV metric that you’re targeting.
- Multiply these figures to get the nominal price which the market anticipates AMD stock will move (either to the upside or down).
- Add (or subtract) this result to the current price ($155.97).
- Calculate the percentage gain (or loss) relative to the current price.
The percentage gain/loss figure will provide a baseline estimate of how long the gap-to-breakeven “wings” should be for your iron condor.
Narrowing Our Wagers
According to Barchart’s Options Overview screen, AMD stock options presently feature an average IV of 53.66%. That’s much higher than the average IV of 39.1% for the options chain expiring Oct. 25. If we use the higher (and thus more conservative) figure, our projected price fluctuation clocks in at 6.88%, either up or down.
About the only balanced condor that could accommodate this range is the 140 | 145 || 170 | 175 trade. At the moment, this condor allows us a gap of 8.41% to the upside breakeven price and 7.78% to the downside. Unfortunately, the yield is only 6.16%. It also means that we would have to put up $471 for only $29 of income.
A possibly better idea is a condor a few steps higher: 145 | 150 || 165 | 170. This doesn’t give us as much protection, with a gap of 6.01% to the upside and 4.64% to the downside. However, the yield lands at 23.46%. We would be risking $405 to earn $95 of income.
These condors aren’t set in stone: you choose the risk-reward profile you’re most comfortable with. For instance, if you believe AMD stock will lean higher in its projected price swings, you can opt for the 150 | 152 || 165 | 167 condor. That gives you a range of 5.93% up, 2.82% down. Further, the yield jumps to 47.93%. This trade involves only $169 at risk for $81 of income.
A Treasure Trove of Ideas
For the Oct. 25 options chain, there were 138 mathematically rational ideas available. Obviously, it would be impossible to cover them all. And that’s just the short iron condor. Multiple variations of the condor strategy exists. Combined with other transaction categories, one stock could offer thousands of trades.
As mentioned earlier, scouring for these opportunities by hand is an impossible task. But that’s the beauty of a Barchart Premier membership. For just a nominal fee — basically amounting to a subscription for a streaming service — you can enjoy access to the full range of trading opportunities.
Plus, multi-leg transactions such as the iron condor aren’t necessarily complicated once you understand the process. However, the researching and setup of such trades can be brutal without algorithms doing the heavy lifting for you. So, focus on the more important stuff and let Barchart Premier handle the grunt work.
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