The market is made up of bulls and bears — and for chip giant Intel Corporation (INTC), one camp is poised to get clobbered. But for options traders, an INTC strangle is a promising way to capture profits and ride the coattails of the directional victor.
When it comes to being bullish on Intel, investors may very well have a point or two supporting why a long stock position in INTC makes sense.
In a richly priced market where broader averages are nearing their all-time-highs backed by dreams of Janet Yellen & Co. doing the right thing — whatever that might be — INTC is off over 7% on the year.
The relative weakness supports bargain hunting, as INTC offers investors a fairly attractive combination of a below-market forward price-to-earnings ratio of 12, a 1.3 PEG and dividend yield of 3.29%.
Additionally, if an investor buys into Intel making strides in growth markets such as cloud/data center or the Internet of Things and areas removed from the albatross of PC’s — INTC stock looks even more attractive.
On the other hand, bears aren’t without their own good reasons for shorting or simply staying away from shares of INTC.
Intel’s inability to branch into mobile due to competition from the likes of ARM Holdings plc (ADR) (ARMH) has been one recent and large disappointment for the company’s growth initiatives aimed at driving future shareholder value in INTC stock.
There’s also Advanced Micro Devices, Inc. (AMD) to consider. The turnaround play’s Zen architecture platform is a threat to INTC stock, as it could come at the expense of Intel’s top-line Piledriver product.
Lastly, other traders have been spied increasing their bearish positions in both INTC stock and options trading in recent days, while a rare sell rating and price target of $26 from Sanford Bernstein are evidence INTC faces challenges yet.
Intel Stock Daily Chart
One thing neither bulls nor bears can lay claim to in this strategist’s opinion is the provided daily chart.
Since last summer’s flash crash, INTC has had its share of uptrends and downtrends. But over the last 10 months Intel has worked its way into a neutral, triangle consolidation pattern — and in our opinion, it’s anybody’s guess as to which direction the breakout will occur.
Supporting this view are a mix of flattish 50- and 200-day simple moving averages. INTC shares are in bull territory above the long-term average, but are simultaneously signaling a bearish Death Cross while maintaining overbought stochastics.
For bulls, a breakout above resistance is closer at hand in INTC stock. But given the described conditions, and who knows, an unforeseen warning? … Well, things could turn convincingly bearish in a jiffy.
This strategist would rather position for and profit from a pending explosive move up or down firmly out of the Intel triangle using a long strangle volatility spread.
INTC Long Strangle Strategy
For traders who agree with this logic, option premiums are relatively affordable for buying a long Intel strangle. Reviewing the board, the August $34 call/$29 put combo for 55 cents is attractive.
The trader’s risk is confined to the purchase price of the strangle, which at expiration is lost in full if shares remain inside the range of $29 to $34.
Of benefit in using this strangle is that time decay is not yet an issue on the August contract. Further, the spread holds a July earnings event within its life cycle and profits are possible if either or both volatility picks up and INTC stock breaks convincingly out of its massive consolidation.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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