On October 6th, a "transformative" partnership between OpenAI and $Advanced Micro Devices (AMD.US)$ drove the latter's share price to surge sharply in a single day, with an intraday peak increase of 36% and settling around 23% at close. After a brief consolidation, AMD's stock price surged again by 11% intraday on October 8th, breaking through $235 to reach a new all-time high.

The rapid price spike of AMD has drawn the attention of options investors. Notably, AMD's Implied Volatility (IV) is now at the 98th percentile of its historical range, suggesting a potential decline in IV in the future. This presents a major opportunity for short-side option traders.

⚙️ The "Epic" Collaboration with OpenAI

AMD and OpenAI signed a four-year GPU supply agreement for a computational capacity of 6 gigawatts (GW). OpenAI would purchase hundreds of thousands of AMD's AI accelerator chips, with the first Instinct MI450 chips scheduled for delivery in the second half of 2026. This collaboration is expected to generate tens of billions of dollars in revenue for AMD over the coming years, significantly boosting its profitability.

Additionally, as part of the agreement, AMD issued warrants to OpenAI, allowing the latter to acquire up to 10% of AMD's shares (approximately 160 million shares) in the future. This deep alignment also implied that OpenAI has a strong incentive to help AMD optimize its hardware and software, representing a profound strategic alliance.

🏦 Institutional Perspectives

Regarding the impact of this collaboration on AMD's future stock price, voices in the market are mixed. Jefferies believes the partnership will drive significant market share growth for AMD, raising its price target for AMD to $300 based on high earnings per share expectations for 2027. Morgan Stanley maintains a more cautious stance, stating that AMD still needs to demonstrate its competitiveness in Return on Investment compared to Nvidia, with a price target of $246. While KeyBanc remains prudent, suggesting potential upside in the AI business might be limited by supply chain issues, maintaining a $160 price target.

Almost all analyses point out that AMD's ROCm software platform is its biggest weakness compared to Nvidia's CUDA. CUDA boasts a mature developer ecosystem, while ROCm still lags in ease of use and stability. Furthermore, the large-scale delivery of tens of millions of high-end GPUs presents a significant test for upstream suppliers like TSMC. Any fluctuations in production capacity could impact AMD's delivery schedule and revenue recognition .

📊 Options Strategies

The most notable trend in the AMD options market is the sharp rise in Implied Volatility (IV), which has statistically reached the 98th historical percentile, an extremely high level. This IV surge is triggered by the "so-called" Gamma Squeeze effect resulting from stock price's rapid spike. Unlike the pre-earnings IV increase for short-term options, the Gamma Squeeze is a universal rise in IV across all expiries and strike prices.

For example, for options expiring in March next year, IVs are above 58%.

Even looking out to June next year, IVs are still above 55%.

The extremely high IV suggests that, regardless of other factors, a single decline in IV to the normal level is highly probable, which presents a lucrative opportunity for short-side trades.

(1) Short Put

From a technical perspective, the stock's gap-up on 10.6 has formed a significant breakaway gap. The bottom of this gap, in the $170 to $185 range, now constitutes major support. So investors betting on the stock's consolidating around current levels or moving slightly higher can consider sell puts, ensuring sufficient margin of safety and lower risk of assignment.

After entering into a short put position, investors can use the options calculator to simulate future option price movements:

After 1 month, if AMD stock price remains unchanged, but IV falls to the normal level (historical median, around 51.5%). The option's price would be halved.

After 1 month, if the stock price rises to $250 (+6%), and IV simultaneously falls to 51.5%. The option's price would decrease by 62%.

(2) Short Strangle

Besides a straightforward short put, if an investor believes AMD's stock price will fluctuate in the near future, then a short strangle strategy could be considered. This involves combining one short call and one short put. This can generate more premium income compared to a single short put.

💎 Summary

A Gamma Squeeze is a phenomenon where a rapid surge in stock price within a short period causes an abnormal spike in IV. High IV typically persists for 1 to 2 weeks before gradually declining. Investors betting on IV reversion should employ short-side strategies. As long as investors are not mistaken about the stock's price direction, the decline in IV could generally contribute to returns.

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