As Intel INTC approaches its earnings report next week, analysts are taking stock of their stake in the semiconductor. Piper Jaffray downgraded the stock to neutral from overweight earlier this week, setting a 12-month price target of $21.50. This doesn't represent much upside for the shares.
The stock was virtually flat in 2010, drastically underperforming the tech sector and the broad market, but earnings have been largely positive. According to Briefing.com, INTC has surprised to the upside in seven of the past eight reporting periods. Analysts are expecting per-share results of 53 cents for the January 13 post-market report; this would be a 33% improvement from year-ago figures.
The chart shows a consolidating stock despite strong earnings – what is an investor to do? One of the potential advantages heralded by option traders is the ability to customize a strategy beyond buy-sell-hold. There are neutral option strategies investors can use when the market (or a particular stock) is expected to move sideways. For more information on neutral strategies for a range-bound market, check out our free three-part webinar series beginning on Tuesday (1/11) after the close.
Two option strategies– one neutral, one bearish – are outlined below. These descriptions are for educational purposes only and should not be considered buy/hold/sell recommendations. Prices were taken after the close on Thursday, when Intel was trading at $20.77, down 17 cents on the day.
Neutral Option Strategy: Iron Condor
Intel went nowhere fast in 2010. In fact, its 52-week range is between $17.60 and $24.37. For those who think Intel shares may be able to continue to hold their ground for the next few weeks, a short iron condor could be one neutral strategy to consider. The February 19/20/22/23 iron condor is built by shorting the February 20 put and buying the 19 put, shorting the February 22 call, and going long the 23 call. This transaction yields a net overall credit of 33 cents per condor.
An investor shorting this condor ideally wants INTC shares to be trading between the short strikes (20 and 22) when these options expire on February 18. If so, the full credit of 33 cents is kept as profit.
On the flip side, maximum losses occur on a close above 23 or below 19. The most this condor trade can lose (before commissions) is 67 cents, or the difference in call/put strikes less the initial credit.
The breakevens for this strategy are $19.67 to the downside and $22.33 to the upside (the short put less the net credit and the short call plus the credit, respectively). If INTC is trading between these levels when the options expire, the iron condor will be profitable.
Intel is currently trading at $20.77 – closer to the lower breakeven price. This trade consequently has a slightly bullish element it allows for more upside room ($20.77 to $22.33) versus downside ($20.77 to $19.67).
Using the profit/loss calculator, I can create charts such as the one below and experiment with how changes in stock price, volatility, and time until expiration can impact a strategy's value during its lifespan. This tool (along with many others) is available as part of an OptionsHouse virtual options trading account.
Bearish Option Strategy: Bear Call Spread
Investors who expect actual downside from Intel as opposed to sideways price action could consider a short call spread. The March 21/23 call spread (selling the 21 call, buying the 23 call) is priced for a net credit of 50 cents. This credit is the maximum potential profit, achieved at expiration if INTC is trading below the 21 strike (as it is currently). The spread is profitable at expiration anywhere south of the breakeven point of $21.50.
Maximum loss is $1.50, or the difference in strike prices less the premium collected. This occurs at expiration if Intel is trading above the 23 strike.
Photo Credit: gillyberlin
The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
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