Trade Update: Intel (INTC): Chips and Dip?

by Dan October 3, 2011 2:06 pm • Commentary

UPDATE OCT 3rd, 2011: INTC‘s fever finally broke, it only took disastrous earnings reports from AMD and MU last week (both stocks down more than 20% since), and a little market sell off for this name to underperform the broad market…..that’s all!

With the stock down about 5% since putting this trade on 2 weeks ago, I am now selling half at .44 (stock ref 20.65).   I have doubled my money (excluding commissions) and I will now let the other half of the position ride through their Oct 18th Q3 earnings report .

INTC’s meaty 4% dividend yield is one of the few things keeping investors interested and it will be a name I looked to buy when things bottom out.


Here’s a preview of a trade I will talk about tonight on Options Action tonight at 5pm on CNBC.

CATALYST: INTC reports Q3 Oct 18

MY VIEW: company recently spoke at Citi’s tech conf and while not specifically discussing the current quarter the tone was decent. Company this weak hosted their annual developers forum and mood seemed fairly upbeat from what I have read from analyst reports…..Well the stock has acted fairly well in sympathy up 11% this week vs the SPX which is up ~5%. Leading up to TXN‘s mid-quarter update last week, many, including me expected a pre-announcement out of INTC…..when this didn’t happen i think shorts covered and those looking to play some catch up piled into the name as a sort of catch up play. I want to take the other side of this….I am hard pressed to think that INTC will not be at the low end of the previous guidance given in July as TXN did last week…..I am also hard pressed to think that the company does not guide down for Q4.

Merrill Lynch Semi analyst who has a Buy and a $23 price target had nice summary of the risks to the name in a not to clients on Wednesday:

Investment Risks: 1) 70% of revenues come from PCs, a market which faces a
long-term threat from a variety of new tablet introductions, 2) Microsoft which has
only supported Intel/AMD x86 architecture in PCs for over a decade has indicated
that it plans to support the competing ARM architecture with the Windows 8
operating system,  3) New higher performance ARM processors expected in 2012
could begin to pressure its server market share, 4) Intel might find it difficult to
enter the very competitive mobile apps processor market, 5) Successful making
manufacturing process node transitions every 2 years, 6) Gross margins could
drop significantly if PC demand ends up being worse than expected.

TECHNICALS: Chart has made a series of lower highs and lower lows since the 52 week highs in April…I think this weeks massive rally is more technical and less about fundamentals….I want to be short at the top end of this trend channel.

1 Yr INTC chart from Bloomberg

TRADE: INTC $22 BUY OCT 21/20 Put Spread for .22

-Buy Oct 21 Put for .50

-Sell Oct 20 Put at .28

Break-Even on Oct Exp:

Profit: btwn 20.78 and 20 make up to .78, below

Loses: btwn 21 and 20.78 lose up to .22, above 21 lose .22