New Trade – $INTC: Levering Up, Looking Down

by Dan March 30, 2015 12:04 pm • Commentary

On Friday afternoon, The Wall Street Journal reported that Intel (INTC) was in talks to buy Altera (ALTR), and both stocks ripped, with ALTR closing up 28%, and INTC at one point trading up 10%, before closing up 6%. With a late Friday report, many would have expected a Monday morning announcement, especially after such a large move in the potential acquisition target. ALTR’s move was far from surprising as most tech investors would expect a $10 to $15 billion deal in the semi space to take place somewhere near 6 to 7x sales, but the move in INTC was very curious in my opinion.

INTC’s near term woes are pretty well known, their PC-centric portfolio after the cooling of an upgrade cycle and the headwinds from the strength of the dollar recently resulted in a downgrade to their Q1 revenue guidance (by about 7.5% at the mid-point).

Its my sense that Friday’s bounce could be an opportunity on the short side for those who believe that when the company reports their Q1 results on April 14th they will guide Q2 below consensus, and that a deal for ALTR will not exactly be a near term positive as it will be mildly accretive this year to earnings and would either deplete a bit of their $21 billion cash position, or cause the company to add to their existing $14 billion in debt.  Levering up to buy a company that has only 7% expected earnings growth and 3% sales growth seems odd to me. Obviously the company wants to diversify a bit, but I am not sure how ALTR’s expected $2 billion in sales will move the needle on INTC’s expected $55 billion in sales.

I think if a deal were announced this week INTC’s shares would actually sell off on the news, possibly back towards $30, where the stock was trading prior to the WSJ rumor on Friday.  If there is no deal then I see no reason why the stock should also not sell off back towards $30 and then trade on its Q2 guidance in mid April. Either way I think the stock goes lower.

Friday’s spike in INTC caused short dated options prices to shoot up, making long premium directional trades a bit difficult.  I want to sell weekly options to help finance the purchase of April regulars that will catch earnings.

Trade: INTC ($31.75) Buy to open April 10th / April 17th 30 Put Calendar for .23

-Sell to open 1 April 10th weekly 30 put at .18

-Buy to open 1 April 17th regular 30 put for .41

Break-Even on April 10th weekly expiration:

-Max profit at 30 on April 10th weekly expiration. Large moves above current levels or below 30 would result in losses.  The idea here is to have the stock move back to $30 where it was trading at 3pm on Friday afternoon and then look to possibly turn the April 17th regular puts that I own into a vertical spread.

Rationale: Ideally I’d like to see INTC settle back towards the $30 level this week at which point I’d have the option to either close the trade for a profit or further spread the April regulars inexpensively for the April 14th earnings results. If the stock climbs between now and then I will still have a cheap put into the event.

The one year chart below shows the importance of the $30 technical support level (red), but also shows the recent waning momentum reinforced by the death cross (circled where the stock’s 50 day moving average in purple just crossed below the 200 day moving average in yellow):

[caption id="attachment_52346" align="aligncenter" width="600"]INTC 1yr chart from Bloomberg INTC 1yr chart from Bloomberg[/caption]