We Win Big! TWICE: 820% and 222% and… No Fries – Chips! (AMD, CHDN, TWNK)

Chanuka Sameach – Ner Revi’i

May the G-d of the Maccabim show us the way b’msirut nefesh to cast down all the Hellenizing wannabes, destroy our Esavian enemy and dispel the Erev Rav from our midst!

Before we get to today’s trade, we have two whopper Thursday closures for you.

The first is our CHDN initiative that arrived at your inbox on November 11th.

The missive was called Why Bet on a Lame Horse? and it urged you to sell the CHDN December 17th 220/230 CALL spread for a credit of $5.60 and buy the CHDN December 17th 230/210 PUT spread for $6.35.  Total debit on the trade was $0.75.

And today…?

The CALL spread can be repurchased for $3.60 (5.50/1.90) and the PUT spread sold for $10.50.

Get it done, and you walk with a ginormous $6.15 on just $0.75 expended.

That’s a Triple Crown 820% paydirt, break-the-piggy bonanza, buddy.

And you didn’t have to venture down to OTB to pocket it.

NEXT!

Hostess Inc. Gets Swallowed Like a Twinkie! was our TWNK trade from November 11th.  It recommended you sell the TWNK January 21st 17.50/20.00 CALL spread for $1.05 and buy the TWNK January 21st 20.00/17.50 PUT spread for $1.50.  Total debit on the trade was $0.45.

Well, today the CALL spread can be bought back for $0.55 (0.65/0.10) and the PUT spread sold for $2.00 (3.30/1.30).

Execute, and you take home $1.00 NET on $0.45 spent.  And that’s a healthy 222%.

Good on ‘Team Depends’ for trading multiples of this one.

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We’re taking on the chip industry today (again), something we’re loathe to do as a matter of policy.

That said, we see that things have gotten so far out of hand, and that stocks have behaved in such a preposterously irrational manner, that we’re forced to oil the chain-mail, take up the broadsword and saddle the Clydesdale for battle.

The stock we’re inveighing against is Santa Clara’s Advanced Micro Devices (NADAQ:AMD), chipmakers extraordinaire, whose stock has quite simply gotten away from itself.

The semiconductor industry is a battleground itself, with AMD, Intel and Invidia (amongst others) caught in a coliseum death match, each vying to grow its business at the expense of the other amid supply chain issues that have created chip shortages for dozens of industries across the globe.

Fundamentally, AMD posts the following Graham and Dodds –

• P/E is 46.16,
• Dividend Yield is BUPKUS,
• Price to Book is 25.36 (whoa!), and
• Insiders dumped 18.20% of their shares in the last half year for a total cash haul of $155 million.

And if you take a look at the price action on the stock, it’s really no wonder.

Here’s the last six months’ trade for AMD –

Technically, the most salient feature of the chart is –

1. The overbought RSI read from three weeks ago (in green).
2. Since then, both RSI and MACD have been diverging against price, indicating an increasing loss of buying momentum (green arrows).
3. RSI is now a day or two from going sub-waterline bearish, while MACD has begun its rollover.  Both developments will bring additional technical selling into the mix.
4. The last 30 days have seen increased volumes (in purple) as the stock crested and insiders opened the SELL valve (November sales tallied just under $45 million).
5. On the price front, we have a bearish rising-wedge pattern (in red) that just yesterday broke below the bottom trendline (in black).  That’s normally a sell trigger, so today’s action will likely be violent.  As it should be.
6. Initial support arrives at 143 (in blue).  Should that level fail, we’ll likely retrace to the 110/115 range, though that could be a couple of months in the making.
7. We would add that BOTH the weekly and monthly charts (not shown here) went RSI OVERBOUGHT (80+) in November, making for a diabolical, bearish, triple-play sell signal that insiders, it appears, took seriously.

And it’s for all the foregoing that we now recommend the following action –

A Jew and His Gold recommends you consider selling the AMD February 18^th 150/155 CALL spread* for $1.80 (15.05/13.25) and buying the AMD February 18^th 150/140 PUT spread** for $5.45 (16.05/10.60).  Total debit on the affair is $3.65.

[*Sell the 150 CALL and buy the 155 CALL.  **Buy the 150 PUT and sell the 140 PUT.]

Rationale: very tight spreads offer us a wonderful opportunity to better than double our money on a reasonable time horizon with limited risk.

Max gain on the trade is $6.35 NET on $3.65 spent.

Max loss is $8.65 (difference between the CALL strikes plus the initial debit.

Our breakeven hits at $146.35, and with price now at $149.11, we need to see a decline of just 1.8% to get there.

And that looks very good.

The trade’s time horizon is generous without being too heavy on time value, and was selected with the expectation of a near term pullback.

Give us the wisdom, Hashem, to know

 what’s ours to do and what’s best left to you.

Many happy returns!

Matt McAbby

Follow @HughLOHaynew