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Advanced Micro Devices (AMD): Love it or Hate It, Here's How to Play It

I envision $25 as the biggest hurdle.
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Nvidia's (NVDA) loss is Advanced Micro Devices (AMD) gain? It may not be that way in the business world, but it is in the stock market currently. And I'm not so sure AMD isn't grabbing business away from Intel INTC and Nvidia as well.

The stock is breaking out Friday morning from a short, rounding consolidation pattern formed over the past few weeks. AMD certainly has the love it or hate it feel on Wall Street. There rarely seems to be a middle ground.

As the shares push above resistance as well as the 10-day simple moving average (SMA), I've targeted a return to the October highs as the next stop for AMD. The $28-29 is still well short of the September highs, but the potential for the high $20s is certainly there.

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I envision $25 as the biggest hurdle. Buyers from the recent push to $25 might be happy to break even and exit the position if we revisit $25. The volume wasn't so great that it can't be chewed through by new buyers. Additionally, the 10% drawdown that lasted only a few weeks probably isn't enough to have scarred investors waiting to sell.

The stock suffered a bit the first week in February as Mubadala Investment sold 34.9 million shares to convert 75 million warrants into equity shares. The sale was priced at $23.65, so AMD has cleared that hurdle Friday. Furthermore, this is a conversion to a larger share position. I view it as a positive for the stock.

We have now removed the overhang of the warrants and seen a major investor increase its equity position. Although I'm not a huge proponent of buying in front of a long weekend, I am willing to take a small-sized position on the long side of AMD.

The Trade:

-- Buy to open AMD March 15, 2019, $23 calls at $1.84.

Net Cost: $184

Max Risk: $184

Max Reward: Unlimited

Breakeven: $24.84

Days Until Expiration 29

Intrinsic Value: $91

This puts the break-even close to the late January high. Traders could consider taking partial profits or rolling the position out and/or up if AMD continues its move higher.

I would use a close under $22 as a stop. If a trader maintains a smaller-sized position they could wait for consecutive closes under $22 before bailing.

At the time of publication, Collins had no positions in the securities mentioned, although positions can change at any time.