Is AMD upside limited?
$Advanced Micro Devices(AMD)$ is a favourite stock among trader with high turnover everyday. Commonly known as AMD, it is a semiconductor company that designs microprocessors, graphics processors, and other computer-related technologies. The stock along with the other semiconductor stocks have been rocketing in the past week and in the overbought region. Today I will discuss the bear call spread trading strategy and how it can be applied to AMD stock.
What is a Bear Call Spread?
The bear call spread is a popular trading strategy used by traders to capitalize on a bearish outlook of a stock. It involves selling a call option at a lower strike price and buying a call option at a higher strike price for the same stock and expiry date. The idea is to collect the premium from the sold call option while also limiting the potential loss with the bought call option.
Why AMD is Rising
AMD has been making waves in the semiconductor industry, with its stock price rising steadily over the years. One reason for this is the increasing demand for its products due to the artificial intelligence hype. As AI becomes more prevalent, the demand for AMD's microprocessors and graphics processors has increased, boosting the company's revenue.
Another factor that has contributed to AMD's success is the US Chips Act. This legislation is designed to incentivize semiconductor manufacturers to increase their investments in the industry, which would benefit AMD's growth.
Lastly, the recent collapse of SVB, a major hedge fund, has raised expectations of an earlier interest rate pause, which has also positively impacted AMD's stock price.
Competitors in the Industry
AMD is not the only semiconductor company in the market. Its major competitors include $Intel(INTC)$ Intel and Nvidia. Intel has been struggling to keep up with AMD's pace, as AMD's products have been increasingly in demand in the market. Nvidia, on the other hand, has been experiencing steady growth due to its dominance in the graphics processing unit market. Texas Instruments has also been growing steadily in the semiconductor industry, particularly in the automotive and industrial markets.
Based on the day chart below, AMD's current resistance is around $100, and it has struggled to break above this level in the past. The relative strength index (RSI) for AMD is above 70, indicating that the stock is in the overbought region. It's also essential to compare the performance of AMD with the broader market. Usually for TECH stock, I will want to look at the Invesco $Invesco QQQ Trust(QQQ)$ QQQ Trust (QQQ), which tracks the performance of the NASDAQ 100 index. Currently the RSI of QQQ is above 60, although it is not yet in the overbought region, the upside may be limited.
Applying the Bear Call Spread to AMD
Currently AMD is trading in the region of around USD 97 to 98. At this critical price level, I plan to sell a call option with a strike price of $98 $AMD 20230324 98.0 CALL$ and simultaneously buy a call option with a higher strike price, such as $102$ $AMD 20230324 102.0 CALL$ . This way, if the stock's price remains below $98, the call option I sold will expire worthless, and I will keep the premium I received for selling it. If the stock's price rises above $102$, the call option I bought will offset the losses from the sold call option. I will likely adjust the option strike prices I am picking according to how the broader market is moving today.
Given the competitive landscape in the semiconductor industry and AMD's current resistance level at $100, I believe a bear call spread is a suitable trading strategy for the company's stock. This strategy allows me to profit from a potential downward move in the stock's price while limiting my potential losses should the rally continue.
Today is a triple witching day when options of stock, stock index and stock-index futures all expire on the same day. So please trade with caution.
Thank you for reading. Do follow me if you are also a swing or day trader like me.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
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