Large-cap semiconductor stocks Intel (NASDAQ:INTC) and Texas Instruments (NYSE:TXN) are storied names in the concrete canyons of Wall Street. But don’t group these two together in today’s volatile market — unless it’s a options-based pairs trade to hedge risks both on and off the price chart. Let me explain.
It’s no secret. The ongoing trade war with China has put increased uncertainty into semiconductor stocks. The revenues generated from the world’s second largest economy is critically huge for much of the industry. And now those sales are increasingly at risk.
From imposed tariffs, there’s increased risk for US semiconductor companies like Texas Instruments and Intel. But don’t lump TXN and INTC stock as being equally at risk.
Investors need to appreciate there could be losers and winners in today’s trade war. Yet, given the volatile political arena these days, who’s to really say what business between the U.S. and China could look like in the months ahead and what other news drivers may be lighting a fire under the pants of investors.
So instead of trying to figure out impacted top- or bottom-lines, using the charts of TXN and INTC stocks in conjunction with an options-based pairs strategy makes a good deal of sense as a path to stronger risk-adjusted returns.
Semiconductor Stock Chart: TXN
The trend continues to look very friendly for bullish TXN stock investors. Off the chart, the company just announced better-than-expected, albeit pre-telegraphed, earnings.
On the TXN price chart there’s been increased volatility on the daily view, but the provided monthly perspective shows the semiconductor stock is forming a second-stage cup-shaped base of several months in duration.
With shares of TXN having successfully broken above the former highs from 2000 and stochastics looking supportive; uncertainty surrounding China is a distant second fiddle to the possibility of a breakout to new highs.
Click to Enlarge
TXN Options Strategy
Reviewing the options market for TXN, I’m a fan of buying the January $125 / $140 call spread. With shares at $113.22 this vertical is priced for $2.25. That amounts to stock exposure of less than 2% regardless if this semiconductor makes good on its technical promise or not. That’s a nice insurance policy.
Of course this spread does require TXN stock to rally to fresh highs by expiration to breakeven, as well as generate profits for this bullish investor. However, with six months on the calendar, an earnings catalyst in the mix and a solid-looking technical platform to break free of, $140 and capturing a profit of $12.75 are definitely within reach of TXN stock by early next year.
Semiconductor Stock Chart: INTC
I’m not going to speak overly-harsh of INTC stock. The fact is shares are in an uptrend just like Texas Instruments. But as the monthly chart also shows, unlike TXN shares this semiconductor failed as it attempted to break above its all-time-highs from 2000.
The ensuing price action has established an engulfing bearish candle confirming a double top pattern. Combined with an overbought stochastics set-up, INTC stock is looking like a short for the time being–or at a minimum, an unattractive long at current prices.
Personally, I’d like to see INTC trim its share price by 10% to 15% before potentially seeing technical value on the price chart and buying shares on weakness. Of course, a failed double top and breakout to new highs would be a powerful signal bears need to abort or risk being run over by stampeding bulls.
That all said, for the time being this semiconductor looks like a short at current prices. But with earnings Thursday after the closing bell, hedging that outlook with a well-designed, moderately bearish spread looks about right.
Click to Enlarge
INTC Stock Options Play
For INTC stock I like approaching potential downside with an out-of-the-money long put butterfly. With shares at $52.43, the August $50 / $47.50 / $45 sets up nicely priced for 27 cents. (That is, buying one set of contracts each for the $50 and $45 puts and selling two sets of contracts at $47.50.) This spread allows traders a very low-cost way to participate in downside with a profit range in-between $45.27 to $49.73. The sweet spot is $47.50. If INTC landed there at August expiration this bear would capture a profit nearing $2.23.
If the earnings event produces a bullish reaction in INTC stock, the 27 cents forfeited — or less than 0.50% of Intel exposure — will undoubtedly feel like a win for this bear.
But what if shares somehow managed to trade below $45? The reality is at expiration this same trader would also be out 27 cents. But rather than feel cheated — if you’re like me and see the value in owning Intel for a nice discount to today’s prices — you should feel like you’ve just been served a free lunch by Wall Street.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
“Financial Anomaly” to Trigger Windfall Profits
As you read this, a rare set of events has created what we believe will become one of the three biggest investment opportunities of your life, no matter when you were born.
This “financial anomaly” could a trigger a financial boom that will hand investors 10x gains … 20x gains … even some 50x gains.
This boom will take place in the legal marijuana business.
If you missed the opportunity to make 50 times your money in internet stocks … or if you missed out on the opportunity to make 50 times your money in bitcoin, you’re going to want to know exactly what’s going on here.
