Update – AMD: Chipping Away at Take-Out Trades

by Dan August 6, 2018 11:38 am • Trade Ideas

Prior to Advanced Micro Device’s (AMD) Q2 earnings results on July 25th, I previewed the print (here) and had the following to say on the company’s future as a standalone company:

I have thought this for a while, and I have no real reason to bring it up again aside from writing about the stock before earnings. But given the hundreds of billions of dollars in M&A in the semiconductor space over the last few years, it surprises me that AMD has not been a serious take-over candidate given their rivalry with Intel in PCs and servers and their competition with Nvidia (NVDA) for datacenter/AI chips and in the crypto space. While earnings have been volatile over the last few years, with GAAP earnings negative from 2012 to 2016 (slightly profitable now), sales are expected to get back above their 2011 peak of $6.5 billion this year. The company’s balance sheet is in good shape, some might say under-levered with $1.38 billion in debt vs $1.05 billion in cash on a $15.5 billion market cap, trading 2.3x sales, well below the average of m&a in the semi space over the last few years. But let’s revisit this conversation after earnings…

At the time shares of AMD were trading just off of multi-year highs at $16.10 and I detailed a risk reversal strategy as a way to play for new highs into the fall, possibly for the potential for a takeout:

…for a take-out trade, as opposed to buying the stock here, Risk Reversal, selling an out of the money put to finance the purchase of the out of the money call or call spread, for instance…

Bullish Trade Idea: AMD ($16.10) Buy Oct 14 / 19 Risk Reversal for 5 cents
-Sell to open 1 Oct 14 put at 66 cents

-Buy to open 1 Oct 19 call for 71 cents

Break-even on Oct expiration:

Profits above 19.05

Losses below 14.05

As I write today, shares of AMD are in fact trading at $19.05 and it makes sense to adjust this position. The Oct 14 puts are offered at 15 cents for a 41 gain and the Oct 19 calls can be sold at $1.70 for a $1 gain, in total this position that would have cost 5 cents when the stock was $16.10 is now worth $1.55. At this point, it makes sense to cover the short put and turn the at the money call into a vertical call spread, further reducing the premium at risk in the trade and actually locking in some of the gains. For instance…

Action: Buy to cover 1 AMD Oct 14 put for 15 cents

Action: Sell to open 1 AMD Oct 23 call at 50 cents

New Position: AMD ($19,05) Long Oct 19/23 call spread for $2 credit, the $1.50 gains from the initial position plus the 50 cents just received for selling the Oct 23 call.


On Friday’s Options Action on CNBC I detailed a bullish call spread risk reversal in AMD in Oct expiration with the stock closing at $18.50 (traded there this morning) for those who think the company could get taken over before Oct expiration:

Here was the strategy, a little different from the one from last week, instead of just short put and long call this one is short put and long call spread, capping potential gains above the short leg of the call spread, from Friday, Aug 3rd:

AMD ($18.50) Buy Oct 16 – 21/25 call spread risk reversal for even money

-Sell 1 Oct 16 put at 55 cents
-Buy 1 Oct 21 call for 77 cents
-Sell 1 Oct 25 call at 22 cents

Break-even on Oct expiration:
Profits of the stock of up to $4 between 21 and 25 with max gain of $4, or 22% of the current stock price at 25 or higher, up 35%

Worst case scenario put the stock at 16 on Oct expiration, down $2.50, down 13.5%