New Trade Alert for Advanced Micro Devices (AMD)
Buy AMD July $9 Call @$3.50 or less
Semi Snap Back Buy
BOOM!!! goes the first week of the New Year to no surprise stock are surging. Leading the way AGAIN is tech up 3%+ in just a few days to build upon the 30%burst in 2017.
A sector that has been strong has been the once left for dead semiconductors. Just a few years ago the decline in personal computer sales was a concern until the next generation of gadgets went gangbusters.
The internet of things will have everything connected and requires chips to chew on.
Compare the SOX semiconductor index up nearly 50% in the last year to Advanced Micro Devices plus a paltry 5%.
Advanced Micro Devices price base has been formed at $10 with the latest lows holding above the last January extremes.
AMD has been stuck between $10 and $12 for two months targeting $14 on a breakout and recovery rally run.
The July option has over six months for Bullish development.
An In-The-Money option gives you the right to be long from a lower strike price and it costs much less than the ETF share itself.
The Options Way: Unlimited Upside Potential with Limited Risk.
An AMD long call option can provide the staying power in a potentially larger trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares, that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for a gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent long shot price explosions.
Good Options can profit from just modest directional moves.
Any trade has a fifty/fifty chance of success. Buying In The Money options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it. The chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With AMD trading at $11.75, for example, an In The Money $9 strike option currently has $ 2.75 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need — time for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right, but only after the option has expired premature to the market move.
Trade Setup: I recommend the AMD July $9 Call at $3.50 or less.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The $9 strike gives the opportunity to be long at a price not seen in more than a year.
The option also behaves much like the underlying stock with much less money tied up in the investment. The Delta of this $25 strike is 82. That also approximates the probability that the option will be in the money at expiration.
The July option has over six months for bullish development.
The maximum loss is limited to the $3.50 or less paid per option contract with an exit stop loss at half the option premium could be used to reduce dollar exposure.
The upside, on the other hand, is unlimited.
The AMD option trade break even is $12.50 at expiration ($9 strike plus $3.50 or less option premium). That is just 75 cents above the stock current price.
A modest move full back to the $14 recent tops in October would put the option value at $5.00 for a 50% gain.