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Technology Stocks : Advanced Micro Devices - Moderated (AMD)
AMD 206.14-4.1%3:59 PM EST
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To: Joe NYC who wrote (123776)6/15/2004 3:07:47 PM
From: Biomaven of 275872
 
Joe,

Thanks for your views on the overall PC market - it's useful for me as I'm really not up-to-speed in this area.

Note you can still make money on a pair trade even if INTC is strong - you just need AMD to be relatively stronger. The advantage of such a strategy is that it takes some of the general market movement out of the risk equation - whether it be the general level of stocks, or the growth in the PC market.

A pair trade does require you to make an overall bigger bet in each of its components than you might be used to doing in individual stocks - but the volatility of your position should be similar to a smaller single position because the two components are fairly strongly correlated.

AMD does seem to have the possibility of an upside feedback loop here. What I mean by that is that an increased stock price produces increased credibility and a willingness to award the stock a higher multiple. (You see it also in stocks where there is credit risk at lower levels - any strengthening in the stock price leads to a reduction in perceived credit risk which leads to a further increase in price - amongst the biotechs SEPR has been a good example when moving up from its single-digit lows). Enron was an example of a downside feedback loop - the weakening of its stock price produced increased credit risk and dilution (because it was obligated to pay a fixed dollar amount using a declining stock) which lead to further weakness.

Now one key thing about upside (or downside) feedback loops is that you can make an absolute killing by buying well-out-of-the-money distant calls (or puts). The options market assumes statistical independence of daily price moves, and so way underprices any option where there is a prospect of a price feedback loop.

Peter
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