On Sept 18th when Advanced Micro Devices (AMD) was trading $13.15 we laid out a bullish case for the stock near term, eyeing their Q3 report that we expected to come prior to October options expiration on Oct 20th (read here: Chips and Rips). In the last week AMD has confirmed that the company will report their earnings on Oct 24th, after Oct expiration, so with the stock up a little more than $1, or about 8% from the trade initiation, it makes sense to roll this position up and out.
To refresh, here was the trade idea from Sept 18th:
TRADE: AMD ($13.15) BUY OCT 13.50 / 16 CALL SPREAD FOR 50 CENTS
-Buy 1 Oct 13.50 call for 65 cents
-Sell 1 Oct 16 calls at 15 cents
Now with the stock at $14.25 the Oct 13.50 / 16 call spread can be sold at 80 cents for a 30 cent profit. Here was the rationale for the trade idea at the time:
The next identifiable catalyst for the stock will be their Q3 results expected the week of October expiration. The options market is implying about a 10% move over the next month between now and Oct 20th expiration, which is just above the 9% average one-day post-earnings move over the last 10 years. The implied movement seems fair considering a stock like NVDA’s whose market cap is 10x that of AMD and is up 5.5% today on just a bullish call from a brokerage firm. AMD’s 18% short interest suggests that investors remain a bit skeptical, also evidenced by the fact that NVDA trades 12.5x its expected 2017 sales vs AMD trading 2.5x its expected 2017 sales.
But I can see a quick catch trade in shares of AMD, back towards its 2017 highs just above $15. And a beat and raise on earnings would cause the breakout that many stocks in the sector are already doing.
Action: Sell to Close AMD ($14.25) Oct 13.50 / 16 call spread at 80 cents for a 30 cent profit.
New Trade: AMD ($14.25) Buy Oct 27th weekly 14.50 / 16.50 call spread for 50 cents
-Buy to open 1 Oct 27th weekly 14.50 call for 67 cents
-Sell to open 1 Oct 27th weekly 16.50 call at 17 cents
Break-even on Oct 27th weekly expiration:
Profits: up to 1.50 between 15 and 16.50 with max gain above 16.50
Losses: up to 50 cents between 14.50 and 15 with max loss of 50 cents (or 3.5% of the stock price below $14.50.
Rationale: the prior position yielded 30 cents in gains, the new position that captures the earnings event costs 50 cents, resulting in a net debit of 20 cents, while we have reduced our premium at risk we have lowered the probability of success by rolling to an out of the money call spread into an event that might prove to be binary. But at the end of the day, my thesis appears to be intact and I like the risk-reward of the position, risking 20 cents to possibly make 1.50 if the stock were to rise by 14% in the coming weeks.