Advanced Micro Devices (AMD) may rank among the top semiconductor companies in the age of artificial intelligence, with AMD stock more than doubling in value over the past 52 weeks. However, the security got off to an uncharacteristically bad start to the new year, losing nearly 7%. Adding some skepticism, the Barchart technical opinion index rates AMD as a 24% weak sell.
Fundamentally, most concerns seem to be linked to the growing concern of an AI bubble. Additionally, while machine learning has accelerated productivity across the board, there are also concerns that much of the recent economic gains have been concentrated in a few prominent tech companies. With such an unbalanced mix of sectors participating in the wealth creation story, the threat of the bubble bursting is huge.
It may be no coincidence, then, that the options market has lit up, especially for hot names like AMD stock. A notable trend to consider is the options stream, which focuses exclusively on large block transactions that are likely to be held by institutional investors.
By mid-February, options flows had turned significantly pessimistic, with many transactions indicating potential bearish intentions. For example, on February 19, net trading sentiment fell to approximately $160 million below par, bringing total trading volume to $201.83 million in the red. In addition, the last four trading days of February saw net negative trades, with most transactions representing debit-based options.
With a debit, a trader pays this premium, which gives them the right to speculate on the direction of the outcome. For the puts to be profitable, then, AMD stock must fall to a certain level; Otherwise, there is a possibility of losing money.
Unless the smart money is in the business of removing capital, the flow of negative options appears to represent a subtle signal that professionals are becoming more cautious about AMD stock.
Perhaps the most important clue about Advanced Micro Devices stocks comes from the volatility skew. In fact, the skew identifies the implied volatility (IV) – or potential movement of the stock – across the strike price spectrum of a given options range. Literally, the skew provides a visual representation of the distortion of the surface area of the volatility space, allowing retail traders to understand how the smart money is structured against risk.
In the case of the March 20 date, the skew near the spot price is relatively flat, suggesting a lack of urgency to protect against daily swings that might occur for a security like AMD stock. However, towards the left-hand boundary (ie towards the low attack), the skew rises at a significant angle.
This arrangement suggests that in a controlled sense, traders recognize the absence of default risk and are thus willing to pay some additional premium for protection.
Now, let’s be clear: No one seems to be panicking about AMD stock. If so, the ski will show kinks much faster due to the high demand for protection. But what’s really noticeable is the tilt (toward higher attacks) in the right hand boundaries. You will see that the IV is not put and the call does not go up much more than the current spot price.
In my opinion, this situation represents data loss. While considerable protection is afforded against the downside risk, the same cannot be said for the upside risk. Put another way, from a smart money perspective, the amount of risk in protecting against volatility is considered greater than the amount of reward in not positioning for the above content.
It was much easier in my head than when I actually wrote these words. In a simple sense, options traders focus on losing rather than winning directly. It’s this subtle sensitivity that makes me think a bear spread might be in order.
I’m not saying that Advanced Micro Devices stock is a long-term bearish trade. If you look at the monthly options series below (ending on April 17th), the volatility skew shows a rising curve on the right-hand side (especially for year IV). Over the long term, the smart money seems to believe that the company will outperform itself.
Right away, though, there may be some confusion. For those who really want to take a bold bet, the 200/195 bear put spread that expires on March 20 is attractive. Basically, you’re looking for AMD stock to fall through the $195 strike at expiration. If so, the maximum payout will be a little less than 104%.
Based on the IV and expiration days, the expected move calculator estimates a split between $182.57 and $217.85. From this framework, the $195 target theoretically sits within the realistic range. Most notably, the smart money seems to be hiding their bets, making the bearish strategy potentially relevant.
As of the date of publication, Josh Enomoto had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
