Trade: -10 AMD 8/13 115/120c for a $0.92 credit
Category: Credit Spread
Minimum Collateral to Enter: $408
Max profit: $920 | RoR: 15% | Collateral: $6,120 | Cushion: 5.38%
AMD is currently on one of the crazier runs I've seen lately from a larger cap stock. See below for the 180d chart which puts into perspective just how quickly it's jumped into triple digits:
Basically a vertical green line. The reason we entered into this trade is that (1) it has some decent cushion on the upside and (2) RSI indicates we will get some short term relief. The two red lines at the top indicate our max profit point ($115) and our max loss point ($120). Since this is a bearish call credit spread we just need AMD to remain below those lines.
The bottom chart on the image above is the RSI, or relative strength index. We reference this metric a lot because it is a really good indicator of short-term performance for a stock. The 180d is currently at 73 (and was up above 80 when we placed this trade) which suggests we'll see some sort of a pullback here soon. The last time RSI was this elevated for AMD was at the end of June (circled below) when the price subsequently dropped $10/share after reaching those levels:
So with that in mind, our plan is to let this trade sit and hope for a pullback that gets the 180d RSI back into the 60-ish level and will then look to exit the trade. We alerted the trade yesterday with AMD at roughly $110/share so we've already gotten a little bit of that pullback that we were anticipating. Now AMD is a really strong stock so it admittedly is a tough one to bet against, so we went with August 13th expiry on this spread to give us a solid two-week window to wait for a pullback.
Exit Strategy: The credit we received on this spread was $0.92 so if we have the opportunity to close out for 50% of our max profit or better ($0.46 or below) then we'll happily take that. 50% or better of max profit in one week is just as good as 100% of max profit in two and realized profits are better than unrealized profits.
If AMD continues its upward surge and tests 115 we'll reevaluate our options and post an update but so far so good, which hopefully won't be famous last words.