This week the news broke about a potential Intel Corporation (NASDAQ:INTC) security flaw and traders punished the stock severely. But they didn’t lose their appetite for the sector because they bought up the competition. For example Advanced Micro Devices, Inc. (NASDAQ:AMD) rallied 5% in an inverse move to that of INTC.
Overnight, the stock suffered another leg lower on the follow up news that Intel CEO Brian Krzanich sold a chunk of his stock before the technical issue in question was public. This is pure noise to me. INTC is a Dot Com bubble survivor. It has endured ups and downs and crushed the competition for a decade. Headlines like this are likely to be mere blips when looking back and therein lies the opportunity.
If markets are going to continue this rally, INTC will recover and this too shall pass! So today I want to take a bullish position in Intel stock but since Wall Street is sometimes fickle, I will not buy the stock outright. I like to have some room for error and when I buy shares I have none. Instead, I will use INTC options where I can build a moat around my trade setup.
Dips these days are rare so when a quality proven company like INTC sells off I go long. But we are at all time highs so leave room for error.
Fundamentally, INTC stock is cheap with a price-to-earnings in the mid teens. While this is not as cheap as Micron Technology, Inc. (NASDAQ:MU), it is but a fraction of Nvidia Corporation (NASDAQ:NVDA) 53 P/E. Wall street experts agree with me since the stock is still trading below their average price target.
Technically, INTC stock still has an open gap from its spike on the October earnings. Although I am not forecasting this, the bears could target that on this swoon so I have to make sure my trade will survive this should it materialize. The stock is still up over 20% in a year so losing a little steam is normal.
This is an uber-bullish stock market so our traditional stock price ramps do not apply. So I have to stick my neck out more often than usual. Using options eases that process as it reduces the need to be surgical in my entry points.
INTC Stock Trade
The Trade: Sell INTC Jan $41 put and collect 50 cents per contract to open. Here I have an 80% theoretical chances that I retain maximum gains, I will own shares and accrue losses below $40.50.
Selling naked puts carries big risk especially in a falling knife situation. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the INTC Jan $41/$40 bull put spread where I have about the same chance of winning. Even though the risk is much smaller, the spread would yield 10% if successful.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
