Today, Advanced Micro Devices Inc (NASDAQ:AMD) experienced noteworthy options activity, with a surge in in-the-money put options and a sizable call option tranche. This development has sparked speculation about the intentions behind these trades, with two potential scenarios emerging.

Bullish investors might be hedging their positions on AMD by engaging in these option transactions, anticipating further gains. Conversely, bearish investors could interpret the current peak of AMD stock as a signal for an impending downturn, prompting them to acquire put options.

We note substantial volumes ranging from 42 to 63 times the previously outstanding option contracts at various strike prices.

For instance, the $138 strike price saw over 22,400 put contracts traded, with AMD stock trading at $137.19. These contracts are already in-the-money, suggesting the buyers anticipate their exercise. Priced at $2.37 per put, the breakeven level is $135.63, requiring AMD stock to fall by an additional $1.56 for the put buyers to profit.

Given the in-the-money status of all put contracts, it’s plausible that many buyers are existing shareholders looking to hedge against a potential decline in AMD stock.

Examining the chart, AMD has surged over 46% in the past month and a half, reaching a peak from a recent low of $93.66 at the end of October. The rapid ascent could be a catalyst for the surge in put option trading, signaling a belief among traders that a cooling-off period may be imminent.

Financially, AMD reported robust Q3 results, with a 4% YoY increase in revenue and an 8% QoQ rise. However, concerns arise when comparing its free cash flow (FCF) margin to Nvidia Corp’s. While AMD’s Q3 FCF was $297 million, constituting 5.1% of its revenue, Nvidia boasted a 38.8% FCF margin in the same period.

This discrepancy raises doubts about AMD’s ability to sustain its current valuation unless it significantly enhances its FCF and margins. The surge in put options may reflect concerns among investors that AMD is vulnerable to a correction, similar to the rationale discussed in a recent article on Nvidia stock.

In conclusion, investors are advised to exercise caution with AMD stock, as the substantial volume in near-term put options could exert additional downward pressure on the stock in the short term.

Featured Image: Pexels © Andrey Matveev

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