2nd Trade Update INTC: Closed Second Half Sept Put Fly for More Than A Double

by Dan September 7, 2012 9:35 am • Commentary

2nd Trade Update Sept 7th, 2012 at 9:35pm:  INTC finally pre-announced a weaker than expected Q3 this morning citing weak PC demand.  Whats remarkable to me that in a market that appears to discount most if not all bad news thrown it’s way, is that INTC is down about 18% from the May Highs while the Nasdaq is making new 12 year highs.  I find this fascinating because most tech investors recognize that INTC is poorly positioned in tablets and a smartphones and that PC demand sucks.

One angle I think is interesting to consider is that there has been plenty of money hiding out in names like INTC and MSFT because of their relatively high dividend yields for tech, low valuations and there very solid balance sheets.   This is a theme that we have been talking about of late in names like PG, KO etc and we fear that investors search for yield may leave them stuck in some businesses that are seeing rapidly declining growth.  Having said that, with expectations coming down fairly dramatically, (the company will update full year guidance on their Q3 call in Oct) you might again see value investors searching for yield re-enter the name.  Technically thought, $24 is a huge support level and will need to hold  here or the thing could get a little sloppy.  BUT I am going to sell the news here and look to re-evaluate the story.

Action: Sold to Close Second 1/2 of my INTC ($24.12)  Sept 25/23/21 Put Fly at .72 for a .44 gain


Trade Update Sept 4th, 2012 at 1:53pm:   In a little over a month INTC has sold off about 6.5% since initiating the Sept Put Fly detailed below, and down about 10.5% since DELL and HPQ reported disappointing quarters and issued weak guidance mid month.  

Action: Sold to Close 1/2 of my INTC ($24.32)  Sept 25/23/21 Put Fly at .68 for a .40 gain

Last week (read here) I spoke about what seemed to be a frenzy of weekly put buying in INTC as traders speculated on the potential for a pre-announcement, this week though, the Sept 7th weekly 24 puts are seeing far less action, even with the stock down 2% today.

At this point, I want to take more than my money off of the table and let the other half ride.  As INTC’s keynote speech at Citi’s tech conf this morning is history, and we get closer to TXNs Sept 11th mid qtr update next week without a pre-announcement, the shares that have under-performed broad tech shares of late could see a bounce without any stock specific news.  Obviously this does not take into account the potential for broad market weakness, but with INTC now basically unchanged on the year, after being up more than 20% at one point, the company’s 3.7% dividend yield may come back in vogue for some investors.

In the meantime I think it is prudent to take half of the fly off as it approaches the mid-point, or the guts of the spread.  If the stock just sits here or drifts lower, the Sept 23 puts that I am short on a ratio should start to decay quicker as we approach expiration, and the Sept 25 puts that I am long will start acting a bit more like stock.

In hindsight a Put Fly turned out to be the right structure given the stock’s rally soon after putting the trade on.  As the stock went up a few % the ratio of the Sept 23 puts to the Sept 25 puts helped offset the change in delta of the 25s. But now with some time elapsed and the 25 puts in the money, the opposite is holding true.

We often debate the use of Flys as they are expensive to trade in and out of, but sometimes they are the perfect structure if you have a good sense for the technical set up, and a little bit of patience.




Original Post Aug 1, 2012 at 3:12pm:

Back on July 3rd, when INTC was ~$26.80, I bought a tight $1 wide Put Spread to express a near term bearish view as the company approached their Q2 earnings event.  The stock sold off prior to the company’s Q2 revenue miss and guide down, so I took the money and ran thus avoiding the risk into the event (read below).

At this point I want to revisit the bearish thesis, but in a relatively low risk manner, and obviously with defined risk.  We have had a handful of data points since INTC’s July 18th Q2 earnings that suggest that the PC market is weak (STX miss, AAPL weak pc units), and even in the face of the Windows8 launch in the fall, 2H PC sales could start to show the ever increasing signs of Tablet cannibalization in a meaningful way.

Potential Negative Catalysts:

Over the next month we will have earnings announcements from DELL (8/16) and HPQ (8/22) and these are likely to be dismal, and as we head into early September, we will have a handful of broker sponsored Tech conferences and Semi Mid Qtr Updates from the likes of TXN on Sept. 11.  If INTC’s qtr is tracking far worse than the downbeat guidance they just gave, early Sept is a likely time to pre-announce if they are inclined to do so.

1 CAVEAT: INTC is a fairly cheap stock trading at about 10x next years expected earnings, and the almost 3.5% dividend yield places at the very high end of most yielding hunting investors list in the tech space.

Technicals: The chart is at an interesting spot in my opinion, still in a meaningful downtrend, and sitting right on some huge support at $26 and bumping up against its 200 day moving average.

[caption id="attachment_15134" align="aligncenter" width="589" caption="INTC 1 Yr Chart from Bloomberg"][/caption]
MY TRADE:  INTC ($25.94) Bought the Sept 25/23/21 Put fly for .28
  • Bought 1 Sept 25 Put for .52
  • Sold 2 Sept 23Puts for a total of .30 (.15 each)
  • Bought 1 Sept 21 for .06

Break-Even on Sept Expiration:

-Profits btwn 24.72 and 21.28 of up to 1.72, max gain of 1.72 at 23.00, profits of up to 1.72 btwn 24.72 and 23, and profits of 1.72 btwn 23 and 21.28.

-Losses of up to .28 btwn 21 and 21.28 and btwn 24.72 and 25, with max loss of .28 below 21 and above 25.


TRADE RATIONALE:  I think there is a lot of money hiding out in stocks like this, where the fundamentals are quite poor and about to get worse.  I want to make a defined risk relatively low premium play that the company’s Q3 deteriorates quickly and that the street comes to this conclusion after the series of catalysts that I named above.  Also I believe investors buying tech stocks, or pc or peripheral names for the big Windows8 upgrade cycle will be sadly disappointed, it won’t exist.