Today’s shopping spree: AMD
Ladies and gentlemen, I Initiated the following position today:
Bought 6 blocks (60,000) of AMD at an average price of 11.32.  To hedge the shares, I decided to use a combination of “out of the money” and “deep in the money” Dec calls. Thus this strategy is termed the “covered called” strategy where the calls’ premium will be provide a hedge against the underlying shares in a downside.
I wrote (”sell to open”) 200 Dec 11.00 calls at .98/contract, and 100 Dec 12 calls at .38/contract. The strike 11.00 (deep in the money) will earn me .66/share in intrinsic value upon Dec option expiration, if AMD closes above 11.00/share. If it closes below, I get to pocket the entire .98/share premium and keep the shares.  I wrote 400 Dec strike 12.00 (out of the money) calls which will generate .48/share, regardless if the shares are above or below 12 by option expiration.Â
Here is my rationale: AMD today dropped 6.6%, to $11.28. Why? Well, I’m not sure. Last week, the company sold an 8.1% stake to a unit of Mubadala Development Co., an investment company owned by the government of Abu Dhabi, for $622 million, or $12.70 a share; the investment is already off 11.2%, a loss of almost $70 million. But that is all just context; it does not explain today’s slide.Â
 Let me be vey clear that I have never been a fan of AMD, especially during the times when the company had a solid edge over INTC (2003). INTC has clearly reduced them to rebels since they launched a series of new generation chips (Zeon 5600 Core 2 Duo and Quad Core chips). Now, with INTC’s new 45nm chip, Penryn, AMD is definitely behind. Wachovia Capital markets analyst David Wong said in a note to investors that AMD’s quad core models worked at speeds well below Intel’s quad-core offerings, which top out at 3 gigahertz. Tech Web site, AnandTech, concluded that AMD’s 65-nanometer Phenom is inferior to Intel’s similar-sized chip.
However, we cannot undemine the fact that AMD will always be INTC’s number rival.  I fully undestand that AMD is cash starved at the moment… But at these depressed share levels, it’s a great “take-over” target!Â
In addition to the above core holding, I will be scalping shares of AMD on an intraday basis to further maximize on the daily volatility. Also, I will be adding to my core holding accordingly, at the proper pivotal points.
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Jack, what is your time outlook on this trade? 6 months to a year or longer?
AMD is planning on releasing a new chip architecture called “Spider” that will show the synergies it created after purchasing ATI. If the platform is successful, it could prove to be a very wise investment. I’ve been looking at AMD for a long time but never felt totally comfortable making the leap. Good luck on your trade, and thanks for the blog. I discovered it a few weeks ago and have been reading its feeds daily ever since.
Blain, the time frame would vary. Market volatility coupled with options’ decay will dictate how long i would hold a particular position. When Dealing with a covered call play, i have held as long as 8 months and as little as 3 days.
Jack, you mentioned this could be an excellent take-over target for someone wanting to have a major foothold in this sector. Who, in your opinion, are the prime candidates for such a major play?
Brandon,
My first pick for a buyer would be NVDA. Now, if it wasn’t for anti-security laws, INTC would love to do a hostile takeover:)
I agree, NVDA would be at the top of my list as well. LOL that would be something to see INTC take them if it was able to be legit…
Hope you have a great Turkey Day Jack!