"Analyzing the Closure of an AMD Hedged Trade Strategy"
- Publication Date: 03/01/2024
Summary
In this follow-up article, we revisit our previous discussion on a short sale strategy with hedging, which we believed could be advantageous for the next 1 to 2 months. Referencing our article published on February 13th (accessible via the link below), we explored shorting AMD stock with a call hedge when it was trading at 171 levels.
While our initial expectation was for AMD to depreciate in value over the coming months, we acknowledged the potential for further market upside and thus implemented a call hedge alongside our short position. Today, AMD has moved contrary to our expectations. We will analyze the closure of the position, covering the short sale at 199 and selling the calls with a 17-point in-the-money position. This article will summarize the outcome of this trade, which did not unfold as anticipated.
Initial Trade Details:
- Trade Type: Hedge Shorting
- Total Trade size: $100
- Asset: Advanced Micro Devices (AMD)
- Shorting Level: Entry at $171
- Hedge Mechanism: Long calls on AMD, March 15/182.5 strike at a premium of $4.90
- Position Structure: 95% investment in shorting AMD shares, complemented by a 5% hedge in long call options
- Duration: The trade is anticipated to unfold over a period of 4 to 12 weeks, with adjustments based on market conditions.
- Expected Risk-Reward Ratio: 2
- Price Target: Setting a short sell price target for AMD at $120, predicated on comprehensive market analysis and AMD’s financial outlook.
Analyzing the Outcome
After several weeks of sideways trading in AMD shares, a significant short covering occurred yesterday, propelling the stock price to a critical level of $181. As the short covering continued to drive the stock higher, we opted to hold onto our hedge call positions, anticipating further value appreciation. We only exited the trade when the price reached the $200 mark, at which point our hedge positions had nearly offset the losses incurred from the short sell. Detailed calculations regarding the trade outcome can be reviewed below.
Trade Closing Date: 3/01/2024
Trade Outcome
Call Option Outcome:
- We purchased call options with a $182.5 strike price of $4.90, which would theoretically control shares worth $4.90 at the purchase time.
- The stock price increased to $198.93, and the price of the call option became $19.40 as we can see from the above option chain price table
- When we sell the call option at $19.40 with the initial purchase price of $4.90, profit from the call position becomes $14.50 which is %14.5 of the overall position.
Short Position Outcome:
- Shorted the stock at $171.
- The stock price rises to $198.93 from $171.
- The loss per share on the short position = $198.93 – $171 = $28.93
- To assess the impact on the $95 allocated to the short position, we must determine the number of shares shorted. With $95, we shorted approximately 0.55 shares, resulting in a loss of $15.91. Consequently, the short position within the portfolio, which was initially short on AMD shares at $171, incurred a loss of approximately $15.91, representing approximately 15.91% of the overall position
Calculating the Net Effect
The short position resulted in a loss of $15.91, while the call position yielded a profit of $14.50. Consequently, the net outcome of this trade was a loss of $1.14, excluding trading costs. In the context of our sample $100 trades, this loss equates to a percentage loss of 1.14% before factoring in commissions.
Important Message from Us
As we conclude our trade analysis for February, I wish to emphasize that the case study presented in this article serves as an illustrative example and is intended solely for informational purposes. Hedging a trade with options necessitates meticulous monitoring of the option's premium. Therefore, it's crucial to obtain up-to-date information and conduct a thorough analysis with your financial advisor.
Our primary objective is to provide you with a perspective that we believe will guide you towards the right direction for exploring potential opportunities and determining their value.
Warm Regards
Sam Sacli
Editor
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