Before we dive into this week’s idea please note there will not be a Profit Booster issue next week, as it’s the second of our two weeks off all year. For those that celebrate, we hope you have a Merry Christmas!
Moving on …
While we closed three December positions for nice profits on Friday, RRC and OLLI stocks closed below our strike prices, which means we are holding stock positions in each, without an option position. This is how we are going to manage each …
RRC has been fairly weak for the past month, and because of that we are going to exit our position today for a small loss.
To execute this trade you need to:
Sell RRC Stock.
In terms of OLLI, it’s been mostly the same story as the stock has not been participating in the market’s advance, and for that reason we are going to sell our stock position for a small loss as well.
To execute this trade you need to:
Sell OLLI Stock.
In terms of the market, with the Federal Reserve signaling that the interest rate hiking cycle is over and that there may even be rate cuts in 2024 the bulls cheered this news as the S&P 500 gained 2.5% last week, the Dow rallied 2.9%, and the Nasdaq added 2.85%.
The Stock – Advanced Micro Devices (AMD)
Why the Strength
Spending on artificial intelligence (AI) infrastructure for the data center market is projected to increase from around $30 billion this year to an astonishing $400 billion-plus by 2027. The big news with AMD is that it sees its data center-class MI300 super-chip as an integral player in this market, with the company’s new AI accelerator (hardware designed and used to process visual data) being capable of performing up to 1.6 times better than the systems of its main competitors.
AMD’s MI300 accelerator series was released earlier this month to great fanfare and looks like the main reason for the stock’s recent strength—the company indicated that it’s already seeing “very strong demand” for its Instinct MI300 graphics processing units (GPUs), which are being billed as the “highest-performance accelerators in the world for generative AI.” AMD also said it’s building “significant momentum” for its data center AI solutions with the biggest cloud companies, server providers and AI start-ups, with the idea that the new products would “dramatically accelerate” the pace of innovation across the entire AI ecosystem.
Another big story here is that AMD’s MI300X chip is expected to compete directly with chip giant Nvidia, which currently controls 80% of the data center AI accelerator market, specifically with its H100 GPU—the most widely used AI chip, and which sells for ~$30,000. (Advanced Micro says the MI300X is faster and offers up to 60% better performance than the H100.)
The new launch prompted several Wall Street institutions to up their price targets, with one major bank asserting that the trends in the AI infrastructure market will likely take decades to play out, leaving AMD with plenty of runway. Analysts expect 16%-ish sales growth next year while earnings rebound meaningfully, with the AI excitement having many thinking there should be lots of upside from there.
Technical Analysis
AMD rallied to a high above 130 in June, but turned lower that same month ahead of the tech sector-wide downturn in July. Shares slowly ground their way down to 93 by late October, when earnings (and the market) came to the rescue and kicked off an explosive rally to above 120 over the next few weeks. A short-lived pullback earlier this month was reversed at the 25-day line, with huge-volume buying seen in recent days following the recent AI announcements. Stop — 119
The Covered Call Trade
Buy Advanced Micro Devices (AMD) Stock at 142.5, Sell to Open January 142 Strike Calls (exp. 1/19/2024) for $6, or a Net Price of 136.50 or less
Static Return: $550 per covered call (4.02%)
Breakeven: 136.50
Covered Call Return (if assigned): $550 per covered call (4.02%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 136.50 or less. (In this case 142.5 minus 6 = 136.5. Or another example is you could pay 143 for the stock and sell the call for 6.50, which also equals 136.5)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on January 3, 2024.
