This article is for entertainment purposes only and should not be considered investment advice.
Stranger Things
There’s something strange and disruptive happening in the GPU marketplace. Via the economics of cryptocurrency mining, and the magic of the sharing economy, you can get paid to buy a GPU.
Let me explain:
If you buy an AMD Radeon 4xx and put it to work mining ETH, you can achieve somewhere between a 50% and 150% discount on your purchase. That’s right. A graphics card that will pay you to buy it.
This is a bit of an oversimplification, but let’s set aside the myriad of factors that will determine the ‘size’ of the mining 'discount' and appreciate this on a more fundamental level:
For what is probably the first first time in history, there are consumer products sitting on retail shelves that pay for themselves via their own use.
The Opportunity
The obvious way to take advantage of this phenomenon is to buy a bunch of GPUs and put them to work mining. But there’s another, under-appreciated opportunity here.
Products that have the ability to self-subsidize are significantly more desirable than those that cannot. The companies that manufacture these products stand to make very large profits because of increased demand for their products, and because they can increase profit margins without impacting the net cost to consumers.
Currently there are shortages of the most popular AMD cards that are used for GPU mining, and the ones that are available are selling well above MSRP.
The Trade
While markets are very good at accounting for established phenomenon (food poisoning at Chipotle, a recall at Ford), they are very bad at discounting things they’ve never seen before, and ‘free’ GPUs via the magic of the sharing economy fall squarely in this category.
Any time I suspect that a change in an asset price will fall far outside of people's expectations, I like to speculate with options.
I’m betting that even after an increase of a couple hundred percent in AMD’s stock price, the longest dated AMD call options are still undervalued.
AMD is currently trading at ~$7.00 per share, and January 2018 is the longest dated expiry on AMD call options right now. Setting a theoretical price target of $20 by January 2018 doesn’t seem unreasonable given the history of volatility in AMDs stock price and the disruption happening in the GPU marketplace.
The current premium for one AMD $10 Jan 2018 call is around $170. Assuming a $20 share price for AMD by Jan 2018, this option contract could be sold for $1000 on that date.
The downside of this trade is limited to the premium paid for the contract, since if AMD is below $10 in January 2018, the contract is worthless.
So, the risk reward looks like this:
Upside: $830 ($1000 profit - $170 cost of the contract)
Downside: $170 cost of the contract.
Conclusion
Self subsidizing products via the sharing economy are a new and not-well-understood phenomenon. This is currently disrupting the GPU marketplace, leading to shortages and premiums on certain classes of GPUs. Using call options to speculate in the stock price of GPU manufacturers is one way to take advantage of this phenomenon.