Advanced Micro Devices has been a favorite ticker among cash flow traders. The appeal is born of three characteristics. First, its share price is low enough to keep the cost minimal for covered calls and naked puts. Second, the volatility is high enough to keep payouts for selling options juicy. And third, the uptrend has been consistent enough to generate steady gains for traders continuing to come back to the well month after month.

And since AMD has a three-day pullback to a potential support zone, I’m using it as a case study on how to build a naked put trading plan.

Trade Profile

If I can get enough premium, I’m interested in using July monthly options. They only have 22 days to go, and my ideal time frame is closer to 40 days. But, as it turns out, I’m finding plenty of premium in low delta options to make it interesting.

Suppose we sold the 45 strike, 14 delta put for 55 cents. It’s nestled close to the 200-day moving average, which effectively means we will win on the trade if AMD stays above this long-term level. Right now, the strike is 14% out-of-the-money, so we have a pretty good margin of error if the stock turns naughty.

Here are the trade metrics:

Max Reward: $55

Probability of Profit: 86%

Expiration Breakeven: $44.45

Initial Margin Requirement: $447

ROI: 12.4%

Naked Put Profile

Suppose we like the numbers enough to pursue the trade. The next step is to follow the SET method by mapping out our plan for entry, stop, and target.

Entry

The two triggers in question for buying dips is to enter above the prior day’s high or enter above intraday resistance. As reflected by the long lower shadow of Thursday’s candle, we did see an intraday bullish reversal, and there were minor resistance levels taken out. If I wanted to enter at the first sign of strength, then I would have pulled the trigger today. Those seeking more confirmation would wait to see if AMD can push above today’s high tomorrow.

A second consideration is if I should enter my full position or scale-in. I prefer scaling, so my plan is to enter 1/3rd now at 55 cents, 1/3 around 80 cents and the final 1/3rd at $1.10. We will need a deeper retracement to get filled on the second two tiers.

Target

Let’s say we want to buy back the puts ASAP near 5 cents. That would lock in 50 cents of the potential 55 cent profit. I would exit the second and third tier whenever I could capture a 50 cent profit on those.

Stop Loss

This is the section that gets interesting. Because I like AMD as an ongoing cash flow symbol, I don’t want to get stopped out if we break support or fall to the $45 strike. Instead, I’m going to let the position ride. If the put is ITM at expiration, I will roll out to the next month to extend the trade duration. The advantage of this tactic is I won’t get whipped out of the trade on noise. The disadvantage is I have more money at risk if AMD crashes.

My position size will need to be small enough to weather a downturn and see the plan through.

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