As many of you know I am pretty bearish and not likely to be suggesting bullish bets anytime soon…..But for a lot of you who invest (rather than just trade) you own stocks and hopefully for good reasons…….sometimes the options market offers unique ways to protect gains, add leverage, or add yield to your equity position with out adding any additional risk.
-See post from earlier to get my take on INTC, or click here.
-Back to you Long INTC Holders….So if you own the stock and are frustrated with its under-performance, but not inclined to sell here and you think there is a chance that a lot of bad news is in the stock you could consider ways to lever that long position into the earnings event….
One Such way is adding a 1×2 call spread to your long stock.
TRADE EXAMPLE AGAINST A LONG POSITION:
-Long INTC at 19.80
-Buy 1 May 21 call for .14 and
-Sell 2 of the May 22 calls for a total of .10 (.5 each)
SO the INTC May 21/22 1×2 Call Spread costs you .04
Break-Evens on May Expiration:
Downside: if the stock is below 19.80 you suffer loses as you would if you were just long the stock plus the loss of the .04 in premium that you paid for the call spread…….
Upside:
-Btwn 19.84 and 21 you make the gains of your long stock,
-Btwn 21 and 22 you can make up to .96 plus the gains in your stock.
-Best case the stock closes at 22 (up 11% ) and you would make 2.20 in your stock and .96 in the call spread (or almost an extra 5% yield from the spread.
-Stock above 22 on May expiration your long stock is called away up 11% and your call spread expires worth .96.
TRADE RATIONALE: If you are long and not going to sell but think the stock could have a relief rally if the company actually was able to beat Q1 earnings estimates and maintain or even raise Q2 guidance, it may make sense to consider a strategy like this to help add some yield to your long with only adding a small premium outlay, which happens to be the only added risk….Now there is always the risk that the stock rips and you have essentially given it away at 22, but you would essentially be selling your long at 22.96 (up 16%) on May expiration (consider that you are long at 19.80 and you over sold one May 22 call against your long position and then you own a May 21/22 call spread that you can make maximum of .96. So effectively you have made 2.20 on your overwrite that is called away and then .96 on your call spread)……….In My opinion the likelihood of a rally much above 22.96 by May Expiration is not great.
-So if you are Staying Long and Strong Consider some stock repair.
UPDATE Apr 19th, 2011 at 3:06 pm: INTC hosting their annual analyst meeting May 17, which could possibly help the stock….. http://www.intc.com/events.cfm