A Smart Money Semi Spread

 

Hey Traders,

Hopefully you were able to attend last night’s big event …

And you now know why watching Big Money Flow can be a HUGE factor in your trading success!

If you missed it, you can find the replay right here … and if you’re quick enough, you might even be able to take advantage of the Big Money trade I gave out!

Today’s Big Money Rundown

This semiconductor stock has been on my radar for quite some time … I’ve been biding my time, waiting to make my move.

Seeing this Big Money play certainly gives me some ideas … and also serves as a warning we might be in for some near-term tranquility.

Let’s look at this Smart Money play on the semiconductor name that I’ve been watching for WEEKS!

Advanced Micro Devices (Ticker: AMD) has really had a blockbuster few months, surging from a near-term low of $72.50 all the way up to an intraday high of $122.49 on August 1.

The semiconductor stock has since pared some of its gains, but has still managed to hang on above the round $100 mark!

Chart courtesy StockCharts

Of course, Tuesday’s steep market slide seemed to hit AMD shares especially hard … and statements from AMD’s CEO Lisa Su that the current chip shortage is likely to last into the second half of 2022 probably didn’t help much.

Yet as AMD slid more than 6% on the day … from $106.83 to $101.52 … someone with deep pockets decided today was the day to make a move.

Timing Is Everything

Shortly after 2:30 p.m. ET on Tuesday, I noticed a whopper of a trade cross the tape …

One trader simultaneously sold a front-month October 110-strike straddle …

And opened a November 105-strike straddle!

You’ll notice these options aren’t cheap …

And these trades were substantial … 26,500 contracts of each option crossing the line!

Had this trader purchased the long November 105-strike straddle up front, on its own, they would have shelled out …

$37,497,500!

However, their sale of the front-month 110-strike straddle brought in a tidy $26,700,000 in premium, bringing their up-front cost down to “only” $10,797,500.

Still, even at the “discounted” rate we can’t ignore that this is a substantial trade … 

What’s it trying to tell us?

That’s what’s interesting.

This straddle swap, more commonly called a calendar straddle, is telling us a couple things.

It shows us that the trader doesn’t expect to see much movement out of the shares in the near-term (or, in this case, might be looking for AMC to recover from yesterday’s slide, and hang around there …), but is looking to take advantage of a later breakout.

Interestingly, on a day when AMD dropped 6%, this strategy is intended to profit from limited near-term volatility.

The trader may also be looking to profit from the time-decay in the near-term October contract.

In a best case scenario, AMD would be trading at $110 on the day of October expiration, allowing both written contracts to expire worthless, while the trader is able to hold on to the long November straddle at their “reduced” cost.

Once this happens, their profit potential is unlimited, while their potential loss is the initial $10,797,500 paid for the trade.

One upside to this strategy is that the trader’s maximum loss is limited, in spite of selling the calendar spread, because if AMD moves drastically in either direction before the October straddle expires, both their long and short straddle will be nearly equal in value, allowing the trader to sell the November straddle to buy back the October straddle.

Now … why does this trader expect longer-term movement out of the shares?

Well, it just so happens that AMD is due to report earnings on October 26 — so a little over a week after the short October contracts expire.

So the trader is able to sell the calendar spread that expires pre-earnings, and hopefully hold onto the post-earnings calendar spread at a highly reduced cost.

So while the trader anticipates AMD to more or less wind sideways (or in this case, hopefully pop slightly higher) through October expiration, they’re ready to take advantage of a post-earnings breakout.

All in all, an interesting move out of someone who clearly has substantial trading capital … 

Remember, if you want to hear my four steps for finding, authenticating, and fine-tuning my own Big Money trades, you can watch me explain it right here!

Your Only Option,

 

Mark Sebastian

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