Market Insights

Advanced Micro Devices has climbed in the last two weeks, and options traders are looking for more gains through mid-November.

Heavy volume was detected yesterday in two calls expiring next month. The trades occurred in dozens of blocks between about 1pm and 3pm ET. Most of the prints had the same size and timing, which suggests an institutional investor constructed a large bullish vertical spread.

Combined, he or she bought about 50,000 November 120 calls for an average premium of $3.08. They sold a matching number of November 135 calls for $0.77. Volume was more than triple open interest at both strikes.

The net cost was $2.31. The position can potentially make 549 percent if AMD rallies gains 25 percent by expiration.

Here’s how the strategy could potentially work:

• Owning calls fix the price where investors can purchase a security. In this case, they have the right to buy 5 million AMD shares for $120.
• Selling calls generates a credit and sets the level where they must exit. In this case, they’ll have to deliver 5 million shares for $135 if the stock reaches that price.
• In other words they paid a net $2.31 and stand to collect $15 from a move to the higher price.

The vertical-spread strategy can let the trader profit from a specific move with limited risk. If the semiconductor company falls, they only stand to lose the $2.31 premium.

Earnings, Artificial Intelligence

AMD rose 1.91 percent to $109.01 on Tuesday. It peaked near $134 in mid-June, which could be why the option trader built the spread to target that zone.

The stock rallied in the spring before pulling back to bounce at its 200-day moving average. Some of the recent gains came after Microsoft (MSFT) Chief Technology Officer Kevin Scott said on September 27 that AMD chips would become “more and more important” for Artificial Intelligence.

AMD’s next earnings report is estimated for October 31. MSFT’s Ignite developer conference on November 14-17 could also be a catalyst. Tuesday’s calls expire on November 17.

Overall option volume in the stock was slightly above average in the stock, according to TradeStation data. Calls accounted for a bullish 73 percent of the total.

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