New Trade – $AMD: Minding the Gaps

by Dan March 6, 2014 12:51 pm • Commentary

This past Monday, some sizable put activity in AMD caught my eye. A buyer paid .69 for 15,000 July 4 puts when the stock was 3.64 (.36 in the money at the time).  The premium paid equaled about 19% of the underlying stock price, so this was either a very convicted bearish bet, or was protection for a long stock position of 1,500,000 shares of stock.

The options activity caused me to look at the stock, which I have not done in a while.  The one year chart is quite fascinating, with three massive gaps lower following the last three earnings events (circled), equaling -12%, -13.7% and down 13.15% respectively.

AMD 1yr chart from Bloomberg
AMD 1yr chart from Bloomberg

What’s interesting about this pattern is that heading into each of the last 3 earnings reports, the stock had been at 3 month highs heading into the print, and after the earnings gap has gone on to make much lower lows before stabilizing.

The 6 month chart below shows the stock’s recent flailing for the last few weeks, making a healthy looking consolidation just below its converging 50 (purple) and 200 (yellow) day moving averages.

AMD 6 month chart from Bloomberg
AMD 6 month chart from Bloomberg

If recent history serves as a guide, the stock could be building up steam for a breakout to fill in the January earnings gap as it gets ready to report Q1 earnings that should come out in the last week of April.

Sentiment on the stock is quite poor, with about 20% short interest.  The analyst community is quite mixed, with 7 Buys, 13 Holds and 7 Sells and an average 12 month price target of about $3.95, or about 6% above where the stock is currently trading.

The fundamental picture for AMD is murky at best.  Its capital structure could become strained in the next economic or cyclical downturn.  In 2012 and 2013, the company had losses on the earnings front accompanied by overall sales declines.  Analysts expect sales to grow and earnings to be back in the black in 2014.  While there has been a lot of chatter about the death of the PC, some component suppliers have been able to weather the secular headwinds.  Not AMD, who has experienced far worse declines than the industry and competitors in their core MPU (microprocessor) sales.  In the near term, possibly the only silver-lining is that the guidance that they gave in January for the current quarter is low enough that the company will actually be able to meet expectations or better.

Maybe fundamentals and the sentiment are so bad that they set up well for a short term bullish trade?  The one year chart below of 30 day at the money implied volatility (blue) vs the realized volatility (white) shows that options are not exactly cheap in the stock.  AMD has not moved in the last month, yet options prices (implied) are about 25% higher than the recent lows:

AMD 30 day realized vol vs implied vol from Bloomberg
AMD 30 day realized vol vs implied vol from Bloomberg

Its also interesting that just as I was about done with this post, I saw the following Tweet from the illustrious Melissa Lee with whom I will be on Fast Money tonight:

So maybe the next leg is not about MPU, but about GPUs???  Admittedly I don’t know a whole heck of a lot about the company, but playing for a gap fill given the recent history looks like a decent play.

So what’s the trade?  Sorry people not much to do in the options market for short term bullish plays. With the stock seemingly in standstill, waiting for it to move could be disastrous for out of the money calls as they would just wilt away.  I am merely going to buy stock here and play for a gap fill and move on, PRIOR to earnings.

TRADE: AMD Bought stock  for $3.73

Downside Stop: Will use a mental stop of $3.50 on the downside.