Trade Idea: Buy AMD, Sell October Calls

07/07/2017 2:55 am EST

Focus: STRATEGIES

Richard Croft

President, R. N. Croft Financial Group, Inc.

Richard Croft, money manager and contributing editor to The Income Investor, highlights his top current picks among option strategies; he cautions, however, that these ideas are meant for those comfortable with a higher level of risk.

Global semiconductor company Advanced Micro Devices (AMD) makes the microchips that run computers and many smart appliances. 

In short, AMD competes with Intel Corp. (INTC) and is the cheaper cousin of the two. Its role as the up and comer — despite the fact it has a long history — makes it a more volatile stock offering more attractive covered calls.

I recommend buying the common shares of AMD and selling October calls against the position. Here's an example: Buy AMD at a recent price of $14.08 per share (all figures in U.S. dollars) and sell the AMD October 15 calls at $1.60 per share. The last day of trading for the AMD October 15 calls is Oct. 20, which is approximately four months from now.

If AMD rises and closes above $15 on Oct. 20, your four-month return will be 17.8%. If AMD stays the same, your four-month return is 11.4%. Finally, if the stock declines, your downside breakeven is $12.48.

Square Inc. (SQ) develops and provides payment processing, point-of-sale (POS), financial, and marketing services worldwide. The company combines software with hardware that allows sellers to turn mobile and computing devices into payments and point-of-sale solutions.

While important as a payment collection system for small businesses, the Square system is only part of the story. The Square Capital division offers loans to sellers based on their payment processing history, with the line of credit increasing as the small business grows. 

In return, Square Capital has slightly higher interest rates, but for a growing small business, this instant access to funds can be a significant advantage.

Think of Square as a mid-cap payments processor and capital provider to small business. It can deliver some high-powered returns as it has done over the past year, which is why Square options offer higher than average premiums.

I recommend the purchase of Square common shares at a recent $23.93 combined with the sale of the SQ Dec. 25 calls at $2.62. The six-month return, if SQ is called away, is 15.4%, while the return if the stock remains the same is 11%. The downside breakeven for this trade is US$21.31.

Subscribe to The Income Investor here…

Related Articles on STRATEGIES