Intel Corporation (NASDAQ:INTC) has had an official correction this year. Wall Street hated the April earnings report, so it punished the stock hard. But since the whole sector has been on fire, INTC stock is still 10% higher than a year ago.
Big dips in quality stocks are usually buying opportunities. Yet as they are happening most investors are frozen out. Fearing steep downward trends is natural but there are ways around this fret.
Momentum rallies are great until they lose their spark. Then weak hands cause a dip that scares most investors out. Most recently investors meme is that Advanced Micro Devices, Inc. (NASDAQ:AMD) will eat Intel’s lunch. While I am not disputing that AMD may actually be gaining fast, I doubt that decades of dominance will disappear this quickly. So Intel is likely to put up a bigger fight against AMD than investors are pricing out today.
Fundamentally, I find it easy to buy into INTC stock because it’s much cheaper than its competitors — especially AMD. The sector is on fire, and for good reason. These are the companies that will power our digital futures. Thus, I’m happy to pay a sub-15 price-to-earnings ratio for a longtime proven performer like Intel.
Technically, I can say that Intel stock is mid-range for the past 12 months, which is by definition close to balance. So as long as equity markets in general hold up, this is likely to be a rewarding entry point into a quality stock.
I have made money from dips in INTC, and I anticipate this being another run for profits. Yet, I will admit that timing may not be perfect, so I will use options to create a buffer which will strengthen my conviction.
How to Trade INTC Stock
The bet: Sell Oct $31 naked puts and collect 60 cents to open. Here, we have an 85% theoretical chance of success. If the price of Intel shares falls below $31, we’ll own the shares and could suffer losses below $30.40. But we don’t need a rally to profit.
Selling naked puts is scary for some, so those with milder risk profiles might want to consider a spread instead.
The safer bet: Sell the INTC $31/$30 credit put spread, where the risk is much more limited. Yet if successful, the spread still can yield 19%. Compare this with buying INTC stock into earnings with zero room for error. If you did that, you’d have to pray Intel rallies 19% just to match the performance of the spread.
Selling options is risky business, so never risk more than you are willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
