Advanced Micro Devices (NASDAQ:AMD) has been a popular choice among option traders, with substantial daily option volume. While AMD stock doesn’t pay dividends, options can be used creatively to manufacture a dividend-like income. Here’s how you can potentially generate a 14.80% annualized “dividend” using AMD options.
AMD Stock Dividend?
Imagine you have approximately $10,000 that you want to invest in AMD stock. Instead of just buying shares and hoping for price appreciation, you can opt for a more conservative strategy. One approach is to sell a put option with a September 20, 2024 expiration and a strike price of $100. You would set aside the $10,000 in cash as collateral in case you are assigned the shares through the short put.
The Income Generation
Selling the $100-strike put can generate approximately $1,430 in option premium over nearly 12 months. This income effectively acts as a dividend on your $10,000 investment, providing a 14.80% annualized return.
The Trade-Offs
Like owning AMD shares, this strategy carries some risks. If AMD’s stock price drops significantly in the short term, you may incur losses. If AMD is trading below $100 at expiration, you’ll be obligated to purchase 100 shares at the $100 strike price, resulting in potential losses if the stock is below $85.
However, if AMD remains above $100 by the option’s expiration, you’ll achieve the 14.80% per annum return as the put option expires worthless.
It’s essential to note that while cash-secured puts are a bullish strategy, they offer limited potential gains, capped at the premium received. Additionally, if AMD’s stock rallies significantly, you’ll miss out on any further upside beyond the option premium.
Managing Risk with a Spread
To reduce risk, you can transform the trade into a spread by buying a $60-strike put option. This turns the original trade into a bull put spread, limiting your risk to $4,000 instead of the full $10,000. This approach can help mitigate potential losses while still generating income.
Conclusion
While options offer versatile strategies to enhance returns and generate income, they also come with risks. The described strategy should be approached with caution and is not a guaranteed way to generate a dividend-like income. Always conduct thorough research and consult with a financial advisor before making investment decisions. Options trading can result in a loss of 100% of your investment, and this article is for educational purposes only, not a trade recommendation. Ensure you understand the risks and complexities of options trading before implementing any strategy.
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