How to Trade a Bearish Option Strategy

06/18/2010 12:01 am EST

Focus: OPTIONS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

The shares of semiconductor maker Advanced Micro Devices Inc. (AMD) have fallen upon hard times in 2010, with the shares down more than 8% since the start of the year. Proving that there is no rest for the weary, the stock has recently engaged in a losing battle with its declining 200-week moving average. This long-term trend line has capped all of AMD's rally attempts since mid April, forcing the stock to retreat from the round-number $10 level.


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At least one trader in the options pits is looking to capitalize on this technical weakness. At about 9:50 am ET, a block of 5,000 AMD July 10 puts traded on the Chicago Board Options Exchange (CBOE) for the ask price of $1.28, or $128 per contract. Simultaneously, a block of 5,000 July 8 puts crossed at the bid price of $0.21, or $21 per contract. Given this data, it appears that the trader entered a bearish debit spread position on AMD.

The total debit incurred for this trade amounts to $1.07, or $107 per contract. The maximum profit is reached when AMD pulls back to $8 per share, with breakeven resting at $8.93. With the stock currently resting at $8.80 per share, it appears that the trader is already sitting on a minor profit.

By Joseph Hargett, contributor, Schaeffer’s Trading Floor Blog

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