New Trade – $INTC In Slide

by CC September 22, 2015 1:22 pm • Commentary

On a few occasions this year we have expressed bearish views in PC-centric semiconductors with Intel (INTC) and Micron (MU) as our favorite targets (here, here & here).

The Philadelphia Semiconductor Index (SOX) is down 13.5% on the year, and down 21% from the 52 week and 14 year high made in late May.  In May, when the index was challenging levels not seen since the downturn following the dotcom bust, the sector was in the midst of a massive consolidation phase with three deals equaling nearly $60 billion. Since then the results of most PC components suppliers, and makers have been weak, and frankly the guidance may not reflect the coming downturn, and the adverse affects of dollar strength for U.S. semis.  

It’s been a couple months since we have short exposure in INTC, then playing for a break of what we felt was a fairly obvious long term head and shoulders top formation.  It did break the long term support (neckline) at $30 and went as low as $25 in the August swoon.

[caption id="attachment_57029" align="aligncenter" width="600"]INTC 2yr chart from Bloomberg INTC 2yr chart from Bloomberg[/caption]

It has since re-tested $30 but recently failed. We think the stock sets up for another re-test of the mid $20s on weak Q3 results and forward guidance when the company reports October 13th.

Trade: INTC ($28.65) Buy Oct 28.50/25.50 put spread for .75

-Buy to open 1 Oct 28.5 put for .98

-Sell to open 1 Oct 25 put at .23

Break-Even On Oct Expiration:

Profits: gains of up to 2.25 between 27.75  and 25.50 with max gain of 2.25 at 25.50 or lower.

Losses: up to .75 between 27.75 and 28.50 with max loss of .75 above 28.50

Rationale:  short dated options prices are elevated given the market environment, and the upcoming event. But a retest of the August lows in the SPX would likely cause a massive spike in implied volatility across the board.  We may be in the exact sort of market where for the time being long premium strategies offering better risk reward than short premium. Especially as we head into Q3 earnings season and all of the uncertainty surrounding the FOMC’s next rate decision at the end of Oct.

[caption id="attachment_57030" align="aligncenter" width="600"]INTC 2yr chart of 30 day at the money implied volatility from Bloomberg INTC 2yr chart of 30 day at the money implied volatility from Bloomberg[/caption]