New Trade $INTC: Chipping Away At July Puts

by Dan April 24, 2015 3:14 pm • Commentary

We have made a couple bearish trades in the semiconductor space in the last couple months, MU (here) and INTC (here). The main reason for the bearish stance has been the waning momentum in a group that was one of the best performing in the Nasdaq last year, their exposure to the strong dollar, weak pc cycle, lack of pricing power in mobile and ultimately what has been some of the worst results and guidance within all of tech.  Oh and the Philadelphia Semiconductor Index (SOX) looks like it is rolling over, having not confirmed the new highs in the Nasdaq and S&P500.  Since breaking out to new all time highs in early February, the index has made a series of lower highs and lower lows:

SOX 1yr chart from Bloomberg
SOX 1yr chart from Bloomberg

The chart, which looks to be forming the right shoulder of a head and shoulders pattern looks heavy to say the least.  

The earnings moves in the group have been generally muted, largely the result of very low expectations, but there was one stock’s negative reaction to earnings that got me thinking about getting back on the short side in the space.  Yesterday Texas Instruments (TXN), declined 7% on a very modest earnings and sales miss, but fairly poor current quarter guidance.  TXN weakness is coming from the usual culprits, PCs and wireless infrastructure equipment, and obviously hurt by dollar strength.  I guess the main take-away is that of all of the stock’s that I expected to have large gaps lower on misses, TXN, who has lots of exposure to autos/industrials, which happen to be strong end markets, these guys were not on the radar.

Back to INTC. The company missed Q4 back in Jan and guided down Q1. Then in early March they pre-announced a worse than expected Q1, and then last week issued a slightly worse than expected Q2.  Expectations were very low to say the least heading into last week’s results, one reason for the stock’s intial 4% pop after earnings.  But the stock has since given back half of those gains. Aside from cheap valuation, 3% div yield and massive share buyback I see little reason to own the stock here.  And frankly, if the company disappoints on Q2 I could see investors losing patience as they wait for an upgrade cycle associated with Windows 10 from MSFT in Q4.

I want to set up to own INTC puts for their Q2 results due in Mid July. But that’s a long ways off, and I dont’ exactly want to sit on long premium trades, so in the mean time I am going to look to finance July puts.

Trade: INTC ($32.17) Buy May / July 30 put spread for .50

-Sell to open 1 May 30 put at .12

-Buy to open 1 July 30 put for .62

Break-Even on May Expiration:

Max profit at $30 on May expiration. Large moves above current levels or below $30 would result in losses. The idea here that the stock will gradually move lower towards $30 and I will continue to roll the short calendar leg to further reduce the cost of the out of the money July puts that I own.  At some point in the next few weeks/months I will look to establish a vertical spread by selling a lower strike put in July and have my earnings trade on.