Why AMD Has 40 Points of Upside Risk vs 30 Points Down

Key Concepts

• Implied Volatility (IV): A metric that captures the market's expectation of a stock's future price movement.
• Call Skew: A market condition where out-of-the-money (OTM) call options are more expensive (have higher implied volatility) than equidistant OTM put options, indicating higher demand for upside exposure.
• Delta: A measure of an option's sensitivity to changes in the price of the underlying asset. A 20-delta option has roughly a 20% probability of finishing in-the-money.
• Premium: The market price of an option contract.

Understanding Implied Volatility and Market Expectations

The speaker highlights that an implied volatility of 100% serves as a market forecast, suggesting that the stock is expected to either double in value or drop to zero within a one-year timeframe. This high level of IV is specifically attributed to an upcoming earnings event, which creates "juicy premium"—meaning options are priced at a significant cost due to the anticipated volatility surrounding the announcement.

Analyzing Option Skew via Delta

To assess market sentiment, the speaker recommends using weekly expiration options to perform a skew analysis. The methodology involves comparing equidistant out-of-the-money (OTM) options using the Delta as a standardized metric:

1. Methodology: Select the 20-delta option on both the call (upside) and put (downside) sides.
2. Data Points:
   • Current Stock Price: $344.
   • Downside (Put): The 20-delta strike is at approximately $315 (roughly 30 points OTM).
   • Upside (Call): The 20-delta strike is at approximately $382.50 (roughly 39 points OTM).
3. Interpretation: Because the 20-delta call is further away from the current stock price (39 points) than the 20-delta put (30 points), it indicates that the market is pricing in a higher probability or demand for a significant move to the upside.

Key Arguments and Market Sentiment

The primary argument presented is that the discrepancy in strike prices for the same delta value is a clear indicator of call skew. In this context, the market is showing a bullish bias or a higher demand for upside protection/speculation leading into the earnings event. The speaker notes that this skew is "significant," suggesting that traders are willing to pay a premium for call options despite them being further out-of-the-money than their put counterparts.

Synthesis and Conclusion

The analysis demonstrates how to use option Greeks (specifically Delta) to uncover market sentiment. By comparing the distance of 20-delta strikes from the current price, the speaker identifies a clear call skew. This suggests that the market is anticipating a potentially explosive move, with a specific bias toward the upside. Traders can use this methodology to quantify market expectations and identify whether the market is pricing in more risk or opportunity on one side of the trade versus the other.