Advanced Micro Devices stock has bounced nicely from an April 8 low, but is now stalling out after a downside reversal on May 14 around its 200-day line. The 200-day moving average is sitting around 127. That makes AMD stock a good candidate for a bearish option trade as it digests its move off the bottom.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call. The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
Let's look at a bear call spread that assumes AMD will struggle to get back above the 130 level between now and mid-July.
A July 18 expiry bear call spread on AMD stock could use the 130-135 strike prices, meaning you sell the 130 call and buy the 135 call. That spread is trading around 75 cents this morning. Traders selling the spread would receive $75 in option premium which is also the maximum possible gain. The maximum loss would be $425.
That represents a potential return of 17.6% between now and July 18.
How To Achieve Maximum Profit
The spread will achieve the maximum profit if Advanced Micro Devices stock closes below 130 on July 18. In that case, the entire spread expires worthless, allowing the trader to keep the $75 option premium.
The maximum loss occurs if AMD closes above 135 on July 18, which would see the premium seller lose $425 on the trade.
Selling the 130 call by itself has the risk of unlimited losses but by adding the long call at 135 you give up some credit but you get protection if the trade goes against you. That makes the bear call spread a risk-defined strategy, and you always know the worst-case scenario in advance. A stop-loss could be set if AMD trades above 130, or if the spread value rises from 75 cents to $1.50.
Bear call spreads can be a good way to potentially generate some income while a stock consolidates.
Ratings For AMD Stock
According to the IBD Stock Checkup, AMD stock ranks No. 10 in its group and has a Composite Rating of 77, an Earnings Per Share Rating of 97 and a Relative Strength Rating of 21.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
