Options Corner: Wild Pricing Dynamics In Advanced Micro Devices Create Profit-Scalping Opportunities

As it turns out, you can't just bend the market to your will, even if you are the most powerful person in the world.

Despite the massive swing in sentiment sparked by President Donald Trump's about-face in the form of a 90-day pause on tariffs, the major equity indices plunged on Thursday. This was in large part due to economic uncertainty. One of the biggest victims was the technology ecosystem, particularly semiconductor giant Advanced Micro Devices Inc AMD.

During the midweek session, Advanced Micro Devics’ stock managed to close at $96.84, a remarkable ascent from the low $80s range mere hours earlier. Unfortunately, a 10% drop during Thursday's afternoon session brought traders back to reality. Undeniably, the violent whipsaw effect has discombobulated many investors. However, for bold and opportunistic traders, there may be an enticing chance to extract quick profits.

Broadly speaking, options-based wagers fall under two categories: you either pay a debit for a specific outcome to materialize or you receive a credit for underwriting the risk that said event will not materialize. That's the core difference between buying options (starting from cash outlay position) and selling options (starting from a cash influx position).

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Typically, risk underwriters — option sellers in this case — receive a margin of safety. Specifically, a stock can move against the underwriter and the net position can still be profitable. That's because there is an obligation to the risk underwriter if the event being underwritten actually materializes. In other words, that cushion incentivizes option sellers in underwriting that risk.

Under normal market conditions, the above cadence is intuitively recognized and acted upon. But during extreme cycles such as the present juncture, this relationship can go out of whack, creating exploitable trading prospects for observant speculators.

Risk Inversion Makes These AMD Put Spreads Wildly Enticing

As mentioned earlier, the core characteristic of a credit-based approach is the original cash influx position. You start with money added to your pocket, with the idea that hopefully, the risk event that you're underwriting does not happen. The magnitude by which nothing happens determines how much of that influx you keep.

If nothing happens at all, you keep the entire influx. If something does happen, you are obligated to fulfill the terms of the contract (either buying shares on put assignments or selling shares on call assignments).

To put it another way, the money that you start in a cash influx position for credit-based strategies is how much the underlying security can move against you and still be profitable. What's happening right now is that for certain debit-based strategies, the risk-taker — not the risk underwriter — receives this margin of safety.

To be clear, debit-based strategies always start off at a cash outflow position. But on paper, certain debit spreads (on the bearish side of the spectrum) start off rather deeply in the money. Better yet, these high-probability wagers also feature relatively high payouts.

Look at it this way. Under a normal debit-based put strategy, the underlying security must fall in value for the puts to be profitable. Due to the current unique circumstances, the underlying security — Advanced Micro Devices stock in this case — can rise in value for specific put spreads to be profitable.

Ordinarily, it's better to be bullish on Advanced Micro Devices since the security has printed a positive bias over the past six years. But because certain debit-based put strategies now enjoy margins of safety, the odds of success for the bearish speculator are surprisingly favorable.

Mathematically, it's not about figuring out the likelihood of Advanced Micro Devices’ stock rising over any given period of time. Rather, it's about the likelihood of AMD rising by the magnitude of the safety margin that favors the debit side.

A Potentially Screaming Deal on Tap

Speculators who want to extract quick profits over the coming week may consider the 92/90 bear put spread for the options chain expiring April 17.

This transaction involves buying the $92 put (at a time-of-writing ask of $720) and selling the $90 put (at a bid of $590). This results in a net debit of $130, the most that can be lost in the trade.

Should AMD stock "fall" to $90 at expiration, the trader can collect the maximum reward of $70. This translates to a payout of nearly 54%.

At this point, alarm bells should be going off. At time of writing, the open market price of AMD stock is fluctuating near the $88 level. Essentially, the tech giant could rise about 2.5% and the aforementioned put spread would still be profitable.

Of course, on the other side of the trade, speculators assume that AMD stock will bounce back. The thing is, the security must do so quite emphatically. That’s what makes the 92/90 bear put spread so intriguing.

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