INTC Stock: 1 Bull and 1 Bear Trade Ahead of Intel Earnings

Semiconductor bellwether Intel Corporation (NASDAQ:INTC) has garnered quite a few headlines due to its failed takeover plans for Altera Corporation (NASDAQ:ALTR). But investors will soon turn their attention toward next week’s first-quarter earnings report, and Intel’s updated guidance figures for the rest of the year.

Intel stock INTCIntel is facing considerable headwinds in the PC market heading into next week’s report. PC shipments fell 6.7% year-over year in the first quarter according to IDC, while Gartner estimates put those declines closer to 5.2%.

The news isn’t so much of a surprise as it is a confirmation of Intel’s March 12 earnings warning, when the company slashed first-quarter revenue guidance from a range of $13.2 billion to $14.2 billion to a range of $12.5 billion to $13.1 billion.

At the time, Intel also withdrew all of its other earnings forecasts and promised to update its outlook during next week’s first-quarter earnings conference call. Intel placed the blame squarely on weaker-than-expected demand for business desktop PCs and lower supply levels in the PC supply chain.

Overall, first-quarter earnings expectations have been lowered significantly, but analysts are still expecting earnings growth of 7.9% to 41 cents per share, from 38 cents per share a year ago. Revenue is seen essentially flat at $12.9 billion.

Sentiment has turned sour on INTC stock in recent months, with analysts seemingly taking the lead. According to data from Thomson/First Call, 26 of the 46 analysts following INTC stock rate the shares a “hold” or worse. Additionally, the 12-month price-target of $36 represents a lackluster premium of only about 15.2% to yesterday’s close.

On the options front, puts have been gaining in popularity on INTC stock over the past month. The culmination of this attention to puts has resulted in an April/May put call open interest ratio of 0.78.  What’s more, when we zero in on the April series — i.e. the options most affected by next week’s quarterly report — we find that the put/call open interest ratio rises sharply to a reading of 0.91.

4-10-2015 INTC
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 All in all, Intel April option implieds are pricing in a potential post-earnings move of only about 4% for the stock, despite the potential for considerable movement following the company’s reissued guidance. As such, the upper bound lies at $32.49, while the lower bound lies at $30.01.

With the potential for things to get worse after Intel’s first-quarter conference call, there is a real possibility that the stock could breach key support at $30, while any rally will be met with stiff resistance at the $32 region and INTC’s 50-day moving average.

2 Trades for INTC Stock

Put Spread: With the recent IDC PC sales figures confirming Intel’s sales concerns, and the company unable to make a deal with Altera, it could take another blockbuster takeover to set the company back on track. As such, I’m inclined to bet with the bears heading into next week’s quarterly report. Along those lines, a May $29/$32 bear put spread has plenty of potential.

At last check, this spread was offered at $1.03, or $103 per pair of contracts.  Breakeven lies at $30.97, while a maximum profit of $1.97, or $197 per pair of contracts, is possible if INTC closes at or below $29 when May options expire.

Call Spread:  On the other hand, INTC stock is widely held and could find support from analysts and institutions following guidance.  Furthermore, another potential buyout deal within the sector could also give Intel the boost it needs to overcome bearish sentiment.

As such, a May $31/$33 bull call spread also has potential.  At last check, this spread was offered at 76 cents, or $76 per pair of contracts.  Breakeven lies at $31.76, while a maximum profit of $1.24, or $124 per pair of contracts, is possible if INTC closes at or above $33 when May options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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