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Investing, Stocks  | August 27, 2020

I sound like a broken record when I write about Advanced Micro Devices (NASDAQ:AMD) stock. It seems like I am always saying to buy the dip.

But there is a well-kept secret on Wall Street guiding me. AMD stock was the best performer in the S&P 500 in 2018 and 2019. It is rare for one stock to have such repeat performance, so it is a bad idea to bet against Advanced Micro.

Under the leadership of Lisa Su, the company has been firing on all cylinders. She has gained the trust of investors, and that is why in my last write-up at the end of June I once again suggested buying the dip.

What ensued was a 70% rally, and the stock is still hovering near that high. The clearest breakout happened at $59 per share. That was where the bulls took the buying frenzy to the next level. The burst higher was monstrous and left many open gaps below.

And therein lies a cautionary point.

The Breakout in AMD Stock Started a While Ago

Remember that I am a big fan of the stock. But chasing this late in the extension seems reckless — at least not without a proper strategy. There are technical reasons to expect exhaustion in addition to the vulnerable rising wedge it has formed. The neckline I just noted had an upside target that matches the recent highs. This is a loosely interpreted cup-and-handle formation that had an upside target around $80 per share. AMD stock has exceeded this, and then some.

Those long the stock should guard their gains just in case.

They can do this by booking some shares, or selling covered calls against them. I prefer that over buying put protection just for the heck of it. If I am looking to buy a new AMD stock position, then I should really wait because the better entry is around $76 per share or lower.

Shares Could Use Some Rest

AMD Stock Chart Showing The Breakout Starting Point and Target

All rallies have to fade at some point, otherwise they become too far extended and vulnerable to sharp corrections. In this case, AMD stock needs to transfer from weak hands to newer, better-committed traders. When the dip comes it will likely find supports at $79, $76, $72 and $68 per share. This is not the same as me calling for a complete correction, but if one comes now, I know the levels to buy.

Which price levels investors choose depends completely on their personal time frames.

There are no one-size-fits-all trades. Those who are believers in what AMD is doing and want to own it for the very long term are not usually worried about finding the perfect entries. But for the rest of us who prefer finding somewhat opportune buy zones, patience is a necessity, especially after such a long rally.

Nevertheless, if AMD buyers can make another high, they could trigger yet another buying wave with $20 of upside. They may even be able to crack into three-digit levels.

This has been a strange year, and if frothy stocks can do it, why not this one? It has already been the S&P 500 champion, so it has a legitimate shot at stardom.

The Safest Way to Chase AMD Stock

The best way to capture this upside potential while leaving room for error is to use AMD stock options. I started my note by cautioning against buying into rallies too late. So by using options I can still participate immediately without placing my money at risk right away.

The trade set-up is done in two stages. The first requires selling puts below proven support to generate income. Then, traders can add stock or call options to capture the breakouts if and when they come.

For example I can sell the October $72.50 AMD put and collect almost $2 for it. The second phase could be as simple as buying a January $100-$110 debit call spread. The net effect of this is hardly any money out of pocket and I would immediately be long AMD stock.

What could go wrong? The worst-case scenario is that I risk owning shares at a 15% discount from current prices, but only through mid-October. As long as the share price remains above $72.50, then I can profit by selling the debit call spread.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

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