In July and again in early August when AMD was $16.10 and $18.50 respectively (here and here) we detailed bullish takeout trades in the stock looking out to Oct expiration.
On Aug 3rd I detailed a bullish Oct risk reversal for no cost:
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 centsBreak-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%
And discussed on CNBC’s Options Action:
AMD is now at $25.35 above the short strike of the call spread and it makes sense to take profits in this position.
Action: Sell to Close AMD ($25.35) Oct 16 – 21/25 Call Spread Risk Reversal for a $2.60 gain
-Buy to close 1 Oct 16 put for 7 cents for 48 cent profit
-Sell to close 1 Oct 21 call at 4.85 for a $4.12 profit
-Buy to close 1 Oct 25 call for 2.22 for a $2 loss
In hindsight it made little sense to sell the Oct 25 call, it was done in an effort to create a zero cost premium outlay, but this example shows how costly it can be to sell dollar cheap options.