Unusual stock options activity has been detected in Advanced Micro Devices (NASDAQ:AMD) as traders flock to out-of-the-money (OTM) put options. This trend might seem counterintuitive at first glance, but it actually indicates a bullish sentiment. The traders selling these puts believe that AMD stock is unlikely to plummet to the OTM strike price.
The report comes on the heels of AMD’s recent Q2 earnings announcement on August 1, which left some investors disappointed. The company reported flat revenue compared to the previous quarter and an 18.3% decline from the previous year. Additionally, its free cash flow (FCF) dropped to $254 million, down from $328 million in the previous quarter and $906 million a year ago.
As a result of the lackluster results, AMD experienced a decline of approximately $7 from its previous price, currently trading below $110 in morning trading on August 10 ($109.91), down from $117.60 the day before.
The surge in put trading activity is notable, with over 2300 put options contracts traded at the $97 strike price. These puts had an average price of $1.58, expiring in 37 days from the date of the report. It’s essential to note that this strike price is significantly below the current spot price, standing at nearly $13 out-of-the-money from $109.91 or 11.75% below it.
Upon further analysis, it becomes evident that much of this put volume is likely driven by short sellers seeking to capitalize on the bearish sentiment surrounding AMD. By selling short these puts with a little over a month until expiration, traders can achieve an immediate yield of 1.623% (i.e., $1.58/$97.00 strike price). If repeated 12 times a year, this would result in an annualized return of approximately 20% (19.55%). This strategy is attractive, given the relatively high out-of-the-money width.
Despite the concerns surrounding AMD’s recent performance and its tepid outlook due to a slowdown in the PC markets, some analysts maintain a bullish outlook on the stock. They project significantly higher earnings for the year ending December 2024, with AMD currently trading at 42.6x earnings for this year and just 27.9x for the following year. Notably, this is substantially lower than AMD’s average price-to-earnings (P/E) multiple over the past five years, which stands at 38.5x.
Potential Upside for AMD Stock
Considering these factors, shorting these OTM puts could be viewed as a favorable long-term play, even if AMD stock experiences some short-term weakness. This contrarian approach suggests that despite recent challenges, there might be room for growth and potential upside for AMD in the future.
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