How Large Option Traders Are Playing AMD Following Xilinx Buyout, Q3 Earnings

Advanced Micro Devices, Inc. AMD announced an aggressive $35 billion all-stock buyout of Xilinx, Inc. XLNX on Tuesday, and AMD shares traded lower by 5% following the buyout news.

AMD also reported quarterly earnings of 41 cents per share, which beat the analyst consensus estimate of 35 cents. The company reported quarterly sales of $2.80 billion, which beat the analyst consensus estimate of $2.56 billion.

A flurry of large AMD option trades have been mixed in nature on Tuesday morning as investors digest the news.

The AMD Trades: On Tuesday morning, Benzinga Pro subscribers received 67 option alerts related to unusually large trades of AMD options. Here are a handful of the biggest:

• At 10:33 a.m., a trader sold 1,000 AMD call options with a $75 strike price expiring on Nov. 20 near the bid price at $7.002. The trade represented a $700,200 bearish bet.
• Less than a minute later, a trader sold another 1,000 AMD call options with a $75 strike price expiring on Nov. 20 near the bid price at $7. The trade represented a $700,000 bearish bet.
• At 11:19 a.m, a trader sold 5,993 AMD call options with an $81 strike price expiring on Friday, at the bid price of $1.551. The trade represented a $920,208 bearish bet.
• At 11:34 a.m, a trader sold 814 AMD call options with a $75 strike price expiring on Nov. 20 near the bid price at $7.951. The trade represented a $606,254 bearish bet.

Of the 67 total large AMD option trades on Tuesday morning, 27 were calls purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish. Another 32 trades represented calls sold at or near the bid or puts purchased at or near the ask, trades typically seen as bearish.

Eight trades were executed near the midpoint of the bid-ask spread, a price typically considered neutral.

Related Link: How Large Option Traders Are Playing Snap Following Big Earnings Rally

Why It's Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest AMD trades, they could potentially represent an institutional hedge.

Xilinx Buyout Action: It’s been a great year for AMD and its investors up to this point, but Tuesday’s negative stock action and many of its large option trades most certainly came in response to the huge Xilinx deal.

AMD management appears to be willing to dilute existing AMD shareholders in the hopes that adding Xilinx will help AMD take significant data center chip market share from Intel Corporation INTC, which continues to struggle with its 7-nanometer chip production.

Intel has long manufactured its own chips, while AMD has outsourced production to Taiwan Semiconductor Mfg. Co. Ltd. TSMC. In recent years, Intel’s manufacturing technology has fallen years behind TSMC, which has allowed AMD’s CPU market share to surge to nearly 20%, its highest level since 2013. At the same time, Intel management recently said it too may soon need to rely on TSMC or another third-party manufacturer to produce its next-generation chips.

Current AMD investors will own roughly 74% of the combined company. Xilinx shareholders will receive 1.7 shares of the combined company per current Xilinx share and will take a 26% ownership stake in the company.

Benzinga’s Take: Bearish AMD option traders likely see the combination as a potential distraction for AMD, while bullish traders see it as a long-term opportunity to gain more share from Intel. While the large option trading action was mixed on Tuesday morning, there were more bearish trades than bullish trades and each of the four largest trades of the day were bearish.