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After September slump, trader plays AMD stock for fourth-quarter rally

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One way to play AMD after Micron earnings, according to trader

Advanced Micro Devices is on track to close out September lower.

The chipmaker has fallen 10% this month, while the SMH semiconductor ETF has remained largely flat.

Longtime AMD bull Todd Gordon, founder of TradingAnalysis.com, sees strong demand and solid technicals as laying the groundwork for a breakout in the fourth quarter.

"We are looking ahead to these new next-gen Zen 3-based CPUs. … Everyone is very much looking forward to this in the tech community," Gordon told CNBC's "Trading Nation" on Tuesday. "Analysts were expecting sales to cool ahead of those new chips, but the customers continue to purchase the AMD chips even ahead of the new launch."

Gordon expects AMD to expand market share, eating into Intel's market slice of the chips space. Increased demand for PCs and chips in the work-from-home environment should also contribute to gains, he said.

"AMD is expected to report earnings on Oct. 27. Right now they have a trailing [price-earnings ratio] of about 160 which is quite expensive. But, keep this in mind, they're expected to increase their earnings per share by about 72% from last year to this year, and they're still expected to grow another 51% next year. The company is only trading 45 times forward earnings with a 50% increase in earnings per share so I continue to be bullish here," said Gordon.

Instead of seeing recent weakness as a warning, Gordon sees it as an opportunity – he said the pullback to the mid-$70s coincides with the 50-day moving average and should act as support.

"I own the stock, I would consider adding to the stock. I hold about 3.5% AMD position in my portfolio which is quite large, but I wouldn't mind picking that up to 4-4.5%," said Gordon.

One way to play AMD, he said, is to put on an options trade that takes you through more than half of the fourth quarter. He's looking at buying the 86 call with Nov. 20 expiration and selling the 100 strike call.

"It's a $15 spread for which you will pay $4.18 cents or $418. Max potential profit would be $1,082," he said Tuesday afternoon

AMD was trading Wednesday at more than $81. A move to $100, his 100 strike call, implies 22% upside.

Disclosure: Gordon holds AMD. 

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