Yesterday the stock market took a tumble on yet another new headline from president Trump about restricting foreign investments into us markets. Equity investors panicked and sold their shares in droves.
The tech sector was hit especially hard given its recent run up. Intel (NASDAQ:INTC) fell 3.5% on the day but that was in line with the sector. The VanEck Vectors Semiconductor ETF (NASDAQ:SMH) also fell 3.5%.
Yesterday’s headline wasn’t an Intel specific problem. But this morning Bernstein downgraded the stock to under-perform and the stock is falling another 2% on the headline. Yet still, therein lies an opportunity to catch the INTC knife — albeit with metal gloves.
We now live in a world that is more dependent on technology than ever. And the adoption rate of this tech is exponential. So suppliers to the industry like INTC will have many prosperous years to come. INTC survived the dot-com bubble, so headlines like the one from yesterday is not likely to destroy the momentum here.
Reactions to headlines that are not based on the fundamentals of a company are often opportunities to go long the stock. Fundamentally speaking INTC is cheap at a 14 price-to-earnings ratio. This is three times and seven times cheaper than Nvidia (NASDAQ:NVDA) and AMD Inc.(NASDAQ:AMD) respectively.
Luckily for investors, INTC stock is still up 48% in a year which in line with the sector. So for those who are investing for the long-term, yesterday’s dip is just an overreaction to a catalyst that is not likely to turn out to be nefarious to the stock.
Nevertheless, the Trump headline is a looming threat and so far is ambiguous enough that I want to leave room for error when I go long Intel stock. Instead of risking $50 per share to buy the shares outright, I use options instead. There I can create a buffer between current price and my level of risk.
2 Trade Ideas for INTC
Technically, yesterday’s dip in INTC brought it back to a pivot zone and those are often support on the way down. However, they are not hard lines but rubber bands. So there could be some more downside to go. The fast rise in INTC stock has established several of these pivot areas. I see several them that I will use as defense to my bullish bet.
Although Intel is not a typical momentum stock, it has acted as one lately. and this makes it hard to trade. On the way down, it seems like it’s headed into an abyss. In other words, I don’t see any clear points of entry. By using options, however, I can slow down the action enough to where I don’t need perfect timing to trade the stock.
The bottom line, I see value in Intel stock and I am willing to bet on it to create income without any out-of-pocket expense. Bernstein downgraded the price target to the low 40’s so I am a buyer of INTC stock there.
The Trade: Sell INTC Jan 2019 $40 put for $1. Here I have a 85% theoretical chance of success. Otherwise and if price falls below it then I would suffer losses below $39.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the INTC Jan 2019 $40/$37 credit put spread which would deliver over 20% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to win.
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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.
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