A Short Term Play Ahead of Intel’s Next Earnings

It’s a theme we’ve seen play out all year… semiconductor companies are facing a rough 2019. Inventory is up, demand is down and expected sales have fallen through the floor.

No company is being hit by all of this harder than Intel. The company’s delayed next-gen chip isn’t expected until the very end of the year, giving it several more months to face these problems.

Despite all of this, when you look at its chart, you wouldn’t know it faced any problems at all:

Screen Shot 2019-04-05 at 2.08.12 PM.png

As you can see, shares have gone pretty much straight up all year so far. The reason is pretty straightforward. Everyone saw a tough 2019 coming a mile away. So, during the second half of last year, investors fled shares of Intel… dropping them from as high as $57 all the way down to $44 in mid-October.

But now they face a stiffer challenge. They seem to have recovered too well. In fact, this current rally is officially deemed over by analysts.

Just today, Wells Fargo analyst Aaron Rakers downgraded Intel noting the current conditions in the industry, increased competition from Advanced Micro Devices and the recent rally.

He still puts a price target at $60, which would be a 19-year high for the chip giant. But that is likely too generous.

For starters, the main problem with Intel right now is that so much relies on its next launch, a brand-new 10-nanometer chip. A few years ago, this would have excited everyone. It did, in fact, as the company has been working on it for quite a while now. But others aren’t sitting back.

AMD, noted in Rakers’ downgrade, is launching its own new chip… a 7-nanometer one. More importantly than size, AMD is coming to market sooner than Intel. The 7-nm launch should come this summer. And in the game of semiconductors, timing is everything.

So, it doesn’t look good for Intel. Yet, the company isn’t in complete trouble. It does have solid sales and earnings. It isn’t valued at any extremes by the market – though it is riding its historical price-to-earnings ratio right now.

There’s no reason to all-out short shares of Intel. But we certainly wouldn’t buy any right now. A dip is almost a guaranteed right now. A retreat back to around $50 wouldn’t shock anyone. And with an earnings announcement planned for the end of this month, we’d argue that now’s the time to make your move ahead of that dip.

Fortunately, you don’t have to short Intel… or even gamble with a put option. Intel isn’t a bad company. But it is due for a slight correction. There’s a strategy for that… one we love to use around here.

A Strategy For Short Term Weakness

Shorting a stock can get messy. You have to use margin with your broker and could fall into a squeeze rather easily. It also doesn’t pay off that well for a company like Intel, which still offers dividends to compensate long investors and remains pretty stable even in bad periods like the current one.

Buying put options is a good answer for this. But they too can be costly. If you pick the wrong one, or the trade goes even slightly the wrong way, you could lose 100% of your money pretty easily.

But there is a final type of play here. It does involve buying a put option. But instead of taking the large cost hit to enter the position, you can offset it by selling a second one.

This strategy is called a bear put spread. As noted, it involves buying and selling puts. First, to enter a bear put spread, you buy a put option with a strike price near the current trading price of the stock you believe will fall. Then, you sell a second put option with a lower strike price.

The trade is still a net debit. But the cost of it is much lower. And because of that, so is the amount at risk.

In exchange for the reduced risk, the maximum potential profit is capped. But for a company like Intel that is due for a retreat but not a full-blown crash, that’s worth the reduced risk.

You can see what that looks like here:


Source: The Options Industry Council

With this strategy in hand, there’s a perfect short-term way to play Intel ahead of its next earnings announcement.

A Specific Trade on INTC

A trader looking to use a bear put spread strategy on the expected fall of Intel could buy a May 17 $55 put for $1.89 per share and sell a May 17 $52.50 put for $0.98 per share. That’s works out to a net debit of $0.91 per share. Based on the 100 shares these puts are worth, that’s a cost and limited risk of $91 for this trade.

That’s it. The trader couldn’t lose any more than $91 if Intel somehow continues to rally over the next six weeks. But a far more likely scenario, would be a fall back to around $50. In truth, this play only needs those shares to fall below $52.50 to lock in the maximum profit.

To find that amount, take the difference in strike prices ($55 – $52.50 = $2.50) and subtract the cost ($2.50 – $0.91 = $1.59). In other words, the risk is capped at just $91. But the potential reward is $159 ($1.59 x 100 shares = $159).

That works out to a 175% potential return on the amount at risk. For it to play out, Intel would only have to take a tiny breather after its long and sizable rally. That’s a likely outcome anyways with the downward pressure it is facing right now. So, why not take advantage?

— The Option Specialist

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About the Author: The Option Specialist