Advanced Micro Devices (AMD) will report their Q3 earnings today after the close. The options market is implying about a 10% one day move tomorrow, which is shy of the 12% average over the last four quarters but inline with the ten-year average. With the stock trading at $33 (nearly exactly where it was prior to its Q2 print) the Nov 1st weekly 33 straddle (the call premium + the put premium) is offered at about $3.35, if you bought that, and thus the implied move between now and Friday’s close you would need a rally above $36.35 or a decline below $29.65 to make money.
Shares of AMD are up a whopping 80% year to date, and up an eye-popping 107% from its 52-week lows made last December and up 20% from its lows just this month. Since the start of the summer shares of AMD has traded in a fairly well-defined range between $27.50 and $35:
The five-year chart below shows the importance of the $35 ish technical resistance range, but also the steep uptrend that came after a crash last year and a bounce off of the 2018 breakout level:
Despite the stock’s performance nearly double that of the SMH, the ETF that tracks the semiconductor space, Wall Street analysts remain fairly mixed on the stock with 14 Buy ratings, 22 Holds and 4 Sells with an average of their 12-month price targets below where the stock is trading just above $32.
Shares of AMD trade about 32x next year’s expected EPS growth of 67% on 25% expected sales growth, Given the volatility in earnings over the last few years that P/E multiple seems just a tad rich especially when you consider competitor Nvidia (NVDA) trades just over 28x expected 2020 eps growth of 34% on 20% expected sales growth, a company with nearly double AMD’s 2019 sales.
So what’s the trade?
I am just not interested in playing for a beat and raise… yeah could the stock be back towards the high from the summer near $35.50 if the company does not disappoint? But I think it is safe to say wth the ytd move and the 20% rally off of this month’s lows that expectations are high. My and Fast Money friend Jared Weisfeld, Tech Specialist over at Jefrries summarized expectations in the print as such in a note to clients today (emphasis mine):
Expect any Q4 weakness to get bought to the extent it’s a supply-driven miss with most of the buyside OK with a +15% q/q revenue guide into December. An in-line revenue guide would be received very positively. From a gross margin standpoint, margins should be up sequentially as Rome continues to increase as a % of the mix and the CFO reiterated this view intra-quarter at sellside conference presentations. The supply constraints should turn into tailwinds heading into the March quarter as other top TSM customers enter low season from a seasonality perspective. The post-print setup is positive with incremental 7nm availability (TSM recently increased their CapEx guidance by 50%), a Navi GPU ramp into 2020, continued Ryzen/Rome share gains, the launch of Zen 3 (Milan), and potential notebook share gains…with INTC likely not having competing 7nm CPU silicon until 2022 at the earliest.
So if I wanted to play for a dip post results but play for a Q1 rally I might consider a call calendar, playing for a near term consolidation, and look to finance longer-dated calls by selling shorter-dated out of the money calls that are pumped up in vol terms into earnings, for instance…
Bullish Trade Idea: AMD ($33.25) Buy Nov – Jan 36 call spread for 90 cents
-Sell to open 1 Nov 15th 36 call at 93 cents
-Buy to open 1 Jan 36 call for $1.83
Break-even on Nov 15th expiration:
This trade performs best with a gradual move towards the 36 strike over the next two weeks into Nov expiration. If the stock is below 36 on Noc expiration the short 36 call will expire worthless and the trade will be left naked long the Jan 36 call. If the stock is close to 36 then the Jan 36 call will have appreciated as it will have picked up deltas. At that point, it might make sense to further reduce the premium at risk by selling a higher strike call in Jan turning the trade into a vertical call spread. The max risk of this trade is the 90 cents in premium paid, and would be at risk with a large move below the current level, or well above the 36 strike.
If you think the company misses and guides down, and that semi stocks, in general, are a tad overdone on the upside then it makes sense to play for a re-test of the recent lows from Oct…
Bearish Trade Idea: AMD ($33.25) Buy Nov 15th 33 – 28 put spread for $1.50
-Buy to open 1 Nov 33 put for $1.75,
-Sell to open 1 Nov 28 put at 25 cents
Break-even on Nov 15th expiration:
Profits of up to 3.50 between 31.50 and 28 with max gain of 3.50 at 28 or lower.
Losses of up to 1.50 between 31.50 and 33 with max loss of 1.50 at 33 or higher.
Rationale: this trade idea risks 4.5% of the stock price into a potentially volatile event with a potential payout of 3 to 1 if the stock is down 16% in the next two and half weeks.
*I’ll remind readers of my normal disclaimer about long premium directional trades into events like earnings, you need to get a lot of things right to merely break-even, first and foremost direction, then magnitude of the move and timing. Trades like this should be considered by those with conviction, but don’t want to be naked short the stock.