Options Theory: How I Traded the AMD Breakout
December 10, 2020
Monday’s Tales of a Technician blog provided insight into how I played the markets in November. I focused on GLD as my trade of the month. I wanted to follow-up with a second trade review because I think it illustrates some key techniques you will find helpful.
Let’s look at how I built positions around the recent breakout in everyone’s favorite momentum stock – AMD.
We highlighted the potential breakout trade over $88 for Advanced Micro Devices over two weeks in the Options Report before it finally triggered. Because the stock has liquid options and plenty of premium available, you can really trade any strategy you want on it. In this instance, I used an OTM bull call spread because I wanted a more aggressive directional play. This is the first tip:
Tip One: Consider more directional strategies with breakout patterns.
They rely more on delta to drive profits than theta.
Here was the original setup on November 23rd.
I bought the Dec $85/$90 bull call for $2. It offered a potential ROI of 150% ($3/$2). Because of the strong bullish undercurrents in the market, I entered on Nov 23rd before the breakout. It was an anticipatory entry that allowed me to get in at a better price. The tradeoff was the lack of confirmation.
Fast forward to November 25th. AMD is once again pushing into $88 resistance, whispering to all listening that it’s getting ready to pop. I wanted to increase my exposure, so I bought shares of stock at $87.23.
This brings me to my second tip.
Tip Two: Buying stock increases the delta of an existing bullish trade.
It’s a way of steepening your risk graph.
I used a tight stop at the prior day’s low so that if the stock soured, I’d quickly revert back to my original position. This logic should make sense. I want more exposure if the stock is working, but less if it isn’t.
A few sessions later, we hit the jackpot. The breakout arrived with a bang. Buyers swarmed, volume swelled, and fun was had by all (except those bozo bears!)
On December 3rd, a pivot high finally formed and I exited half of the stock position when the prior day’s low broke. My exit was $92.23.
After a few days back and forth, I exited the rest of the stock on December 8th at $92.68.
With the 85/90 bull call spread still ITM I elected to let it ride in hopes that buyers would keep prices drifting into December expiration. Wednesday’s whack was a little painful, but I held through it, and fortunately support held. At this point, the hope is that AMD holds firm for another week into expiration.
And that brings me to my third and final tip.
Tip three: When prices rise past your higher strike in a bull call, it is a positive theta trade.
Riding closer to expiration can increase your gain even if the stock treads water.
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