INTC: Too Far Too Fast, Low Premium Bearish Trade Through Dec Exp

by Dan November 8, 2011 11:14 am • Commentary

INTC is one of the few large cap “ol Tech” names to outperform the broader market this year up almost 16% ytd vs the Nasdaq that is only up 1.75%.

-Wall Street analysts fairly positive on the stock with 32 Buys, 17 Holds and only 5 Sells with an avg 12 month price target of 27.05.

-Stock may appear cheap trading at about 10x next years earnings estimates, but with eps and revenue growth  expected at only 5% this may be trading at premium pe to growth.

-When the company beat and raised for Q4 in late October at the beginning of the Q3 earnings cycle, estimates for INTC had be somewhat subdued to the  apparent weakening demad for pcs…..This is no longer the case after a string on consecutive beat and raises and expectations might have gotten a bit ahead of themselves as we head into a seasonally slower period.

MY TAKE: I Want to get short the name but use a structure that has been working for me on a tactical basis…..I want to use tight $1 wide put spreads and look to Dec expiration.  The stock is up almost 28% since early October nearly doubling the performance of the SPX.  I feel in the near term the stock could pull back 5-10% in the coming weeks as investors may look for my beta into year end if looking to play a year end rally.

– the chart is sitting within a few % of the multi year highs and obviously reflects a good bit of enthusiasm.

1 Yr INTC chart from Bloomberg


So here’s the trade: 

TRADE: INTC ($24.37) Bought the DEC 23/22 Put Spread for .19

-Bought 1 Dec 23 Put at .39

-Sold 1 Dec 22 Put at .20

Break-Even On Dec Expiration:

Trade Profits btwn 22.81 and 22.00 make up to .81, below 22 make full .81 or 4x your money

Trade suffers losses of up to .19 btwn 22.81 and 23 and max loss is .19 above 23.

CONVICTION LEVEL is medium, but as evidenced by the out of the money, low premium tight spread I am not going all in here, and in some ways i want to spread out some shorts where i risk a little to make a lot if we get a 10% pull back in the name…..