New Trade INTC: With Bearish Conviction Tempered, For Now, Put Calendars Make Sense

by Dan July 17, 2012 2:17 pm • Commentary

INTC reports Q2 earnings tonight after the close.  The options market is implying about a 5% move which is fairly rich to the average move over the last 4 qtrs of about 2.28%.  Two weeks ago when INTC was trading about 5% higher I bought a July 26/25 Put Spread for .18 that I ended up selling in 2 parts (read below) for an average of about 3x what I paid.  The stock was down in sympathy with generally weak sentiment for semiconductor shares on the heals of downward estimate revisions by many Wall Street analysts, coupled with the shockingly horrible Q2 earnings warning from INTC’s primary competitor AMD.

With the stock down about 12.5% from the early May high, but up about 5% from last weeks lows, I think the stock at current levels is a tough call.  A lot of near term negative sentiment is in the stock, and bulls are looking to the fall where they see catalysts of a PC upgrade cycle as a result of MSFT‘s Windows8 release, a whole host of new UltraBook offerings and new mobile design wins.

My take is pretty simple, INTC is a cheap stock with a decent dividend yield so the stock screens as slightly defensive, but lacks growth in a commoditized space.  So if we are going into a recessionary environment, the stock will have plenty of room to drop, significantly even.  BUT, I am not sure you are going to get the catalyst on tonight’s earnings call for that drop.

Possible Scenarios:

If the company had a bad miss on their hands for Q2, they would have likely pre-announced already, so Q3 guidance, and general visibility for the balance of the year will be the mover.  I see 3 possible scenarios:

1.  If the company comes clean and speaks to poor visibility, but they don’t take down guidance below some recent estimates cuts by analysts, the stock is likely to have a muted reaction (i.e. up or down a few %, but not an out-sized move).

2.  I see a very small likelihood that the company is able to maintain or actually raise guidance given some of the recent negative pre-announcements by competitors, equipment suppliers and supply chain partners.  But with the stock at the low end of the recent range (relative to the May highs) the stock rallies a bit back to maybe 26.50 or so, but I see little chance of a melt up in the shares.

3. INTC not only has a miss on Q2 but they guide below consensus for Q3 and the guidance they give is murky at best… this is the scenario that sends the stock immediately back to support at $24, on its way in the weeks to come to probably $22.


With only a few days until expiration the earnings cycle July options have been jacked up to make up for some risks of being too dollar cheap into a binary event. What that does sometimes is allow for a decent calendar play that gives you several scenarios in which you can win (its normal lows in implied volatility following earnings.) By selling July options and buying the corresponding option in August you can have a position that covers the expected decline in August volatility by the expected decay in the few days until expiration in July. August volatility is close to 30 heading into the event, and will likely be closer to 20 following the event.

[caption id="attachment_14451" align="aligncenter" width="728" caption="2 yr IV vs HV from Livevol Pro"][/caption]

MY TRADE:   While the above scenarios are far from scientific, they leave me with a conviction level which doesn’t exactly scream make an outright directional bet.  After reading the note below from July 3rd, it is obvious that I think INTC is facing it’s share of headwinds in the month to come, but I am not willing to make that bet today, prior to the call.

With implied vol pumped in July with just 3 days to expiration, I would rather Sell July and Buy something longer dated that is a bit more reasonable in an effort to make a directional bet. Calendars look pretty interesting to me here.


TRADE: INTC ($25.55) Bought the July / Aug 24 Put Spread for .22
  • Sold 1 July 24 Put at .13
  • Bought 1 Aug 24 Put for .36


Break-Even On July Expiration (Friday):

If INTC is $24 or higher on Friday’s close you effectively own the Aug 24 Put for .20 and at that point I will look to sell a lower strike put in Aug to turn into a Put Spread.  If there is a dramatic move below 24 after tonights print, I will make the difference btwn the Aug Put that I am long and the July that I am short and look to take off the entire postion.  My Max Risk is the .22 premium that I paid for the spread.

CONVICTION LEVEL:  I am obviously bearish in the market and on tech stocks in particular. I have no reason to believe that INTC will issue results or guidance worse than that of some other semi-conductor companies that have already pre-released, this generally a very well run company.  We are trying to do our best to avoid binary situations, especially around earnings, and especially when conviction level is not high, so the higher than normal implied move gives us an opportunity to use a strategy where we can profit under a bunch of different scenarios.  I feel I may have a beter entry point for the short in the days to come….







Trade Update July 12th, 2012 at 9:55am:  With INTC down about 7.5% since initiating this tight $1 wide July put spread last week, and  then selling half Tuesday for more than a double I am going to sell the 2nd half of the position at .70 (stock ref 24.80) for almost 4x what I paid for the spread.  So my average sale price is .56, or about 3x what I paid.  With earnings next week I am now risking .70 to make .30, I think I will take the money and run and look for a better re-entry point, possibly with a longer dated structure.

ACTION: Sold 2nd Half of the July 26/25 Put Spread at .70 (stock ref 24.78)   My avg sale price was .56 or 3x what I paid last week.


Trade Update July 10th, 2012 at 11:14am: AMD pre-announced weaker revenues for the second quarter last night and the stock is down about 10% this morning citing weaker Chinese and European sales. AMAT, who makes semi equipment, and a huge supplier to INTC also cut its forecast for the year this morning and the stock is down about 2%.  Oddly, INTC had a delayed reaction to this news, or investors just didn’t care, more focused on the fact that the stock trades at 10x earning and has a 3.5% dividend yield.

With INTC now playing a bit of catch up to its semi peers, and the stock down about 2% on the day, I am going to sell the July Put Spread that I Paid .18 for at .42 (stock ref 25.65) or more than a double for a .24 profit.  I will let the other half ride now, and I can’t lose on the position.

ACTION: Sold Half of the July 26/25 Put Spread at .42  (stock ref $25.85)


It’s tough short a name like this at 10x earnings, but if you do you have to have conviction that they are poorly positioned for the new mobile computing world, I kind of do, but will continue to do work on the them.



Original Post July 3rd, 2012: New Trade INTC: Tablet Cannibalization is Coming, Some Chip Makers May Be Left Out in the Cold

When INTC reported their Q1 results in mid April the company guided down for Q2, specifically, gross margins from 64% to about 62%.  Company kept their guidance in place for the balance of the year, and the real question heading into the company’s July 17th, Q2 conf call will be whether or not they were conservative enough for the balance of 2012.

Wall Street analysts are very mixed on the stock with 27 Buys, 25 Holds and 4 Sells even as the stock shows relative out-performance (up ~10.5% on the year) to both the SPX and the SOX, up 9% and 6.5% respectively.  I assume the 3.3% dividend yield has something to do with it, as it is viewed a bit more defensive than some other higher beta names in the space.

I am going to do a deeper dive on the name as we get closer to earnings, But with the stock up, and vols in, I wanted to look for a slightly cheeky way to make a near term bearish bet in front of earnings.  With all of these new tablets coming to market from the likes of MSFT and GOOG, I want to get a better sense for what margins on cpu’s going into tablets vs PCs ,really looks like and who is best positioned to absorb slowing PCs sales as tablets make inraods.  I suspect that INTC might have been caught flat footed as they have very few design wins as of yet in the tablet space…..

This is not THE trade in INTC for the summer, but this one gives me a little exposure with defined risk for the time being.


TRADE: INTC ($26.82) Bought the July 26/25 Put Spread for .18
  • Bought 1 July 26 Put for .32
  • Sold 1 July 25 Put at .14


Break-Even on July Expiration:

Profits btwn 25.82 and 25, make up to .82, max gain 25 or below of .82 or 4x your money.

Losses of up to .18 btwn 25.82 and 26, max loss of .18 above $26.