Despite all the talk that AMD stock is a falling knife, I had to place a bet on it long. I have put $820 on black … er umm I mean AMD stock. As silly as it seems, it is a gamble that I believe warrants taking.

The Good

1. AMD’s revenues are not that terrible.

2. AMD has a decent looking balance sheet.

3. AMD is probably oversold a little.

4. AMD options are very cheap.

I bought into AMD options for Jan 2015 @ 2.50 for a whopping $.82 a contract. That means I picked up a mean 10 contracts. If this stock gets a little bit of life and returns to the $5 range in the next 762 days, we’re talking $2500 on my $820 (204% return)

Now let’s talk about the bad. AMD’s presence in the computer market has simply been getting smaller. I’m actually in the market for a computer and I personally don’t see any real reason to go AMD unless there is an absolute killer deal (which hurts overall margins). This is a giant problem, a potentially brand ending problem, but I have faith that AMD will stick around. I believe if a recovery does come, it’s going to take a while (and hopefully it’s within the next 700 days or so).

But ultimately it comes back to the simply risk vs reward. I think the odds of this stock touch $5 in the next 700 days or so is probably 30-40% (gut feeling off fundamentals). I think there is even a small chance it could higher than $5 a share. Factor that into a quick equation, The option’s value seems worth the gamble.

Interesting enough, if you think it’s 50/50 AMD will recover or go bankrupt.. straddle options are looking amazing on AMD. You can get in for about $.40 on a $1.0 put / $7.0 call straddle. This for people who aren’t familiar with straddles would mean you would capture any gain below $1 and any above $7 from now until Jan 2015.

And if you really think AMD is done in the next two years, then just buy the $.18 ask Jan 2015 @ $1.0 put, if the company does go out of business entirely you can expect a solid 400% return.

Final thoughts:
I would argue that option plays on AMD are the safest play you can make on the highly volatile AMD. Buy 1000 shares at $2390 or pay $820 for virtually all of the upside on the same amount of shares (from now till Jan 2015) and risk 1/3 the money if it completely tanks and defaults.

Option traders are looking for high volatility to make money and just take a look at that chart. This feels like Sprint all over again. This is why I’m $820 in AMD long (but considering adding in that $1.00 put contract for $.20 to make a straddle).

Tagged with:

Filed under: InvestingOptionsPersonal Portfolio Update

Like this post? Subscribe to my RSS feed and get loads more!