Think 1990s, and you probably think of Nirvana and/or Seinfeld. But, hey, this is an options site, so you probably also think of irrational exuberance and the tech bubble, and, of course, Intel (INTC).
It was not that long ago that INTC was the “it” stock. Every product was getting “smarter,” and to get smarter, you needed a chip inside. And Intel was the undisputed king of all chips — the veritable pulse of the tech biz.
Back then, it was also the king of Amex options, when exchanges had exclusive product listings. The trading crowd in those days looked like a veritable futures pit.
Well, it’s 2010 now, and the crowds have moved on, as has the tech biz itself. But it’s still Intel, and it’s still relevant. And the company reports quarterly earnings Tuesday after the close, so they still provide a front-end look at the earnings season about to unfold.
As we recently noted with Research in Motion (RIMM), we often see large bid-ups in options premiums ahead of earnings reports. If you’re of a mind to sell those pumped-up premiums into news, you probably won’t find much to tempt you on the Intel board.
With the stock closing $22.45 Wednesday, the April 22-23 strangle closed at 59 cents. That’s a mid-to-high 30s volatility, which is high for Intel — but not all that high. If earnings weren’t on deck, April options would likely carry a 25 volatility or so. Throw that onto the options board, and that strangle would trade for about 34 cents.
So we’re talking about a roughly 25-cent options bid-up into the report. In percentage terms, that sounds like a lot. I mean it’s around 40% of the price. But it’s still 25 cents no matter how you slice it, so you would need to make a fairly large trade to realize any significant gains.
And before you act, consider this: You still have three trading days to “weather” before they actually report. Some of the options pricing has that in mind. But really not much.
If INTC still trades near here, I’d guess that strangle will still have at least a 45- to 50-cent bid. So sell tomorrow and you’re essentially pocketing maybe a dime in return for the risk that INTC actually moves between now and earnings day.
I generally like selling options premium in some form before an earnings report and managing the position, but I prefer doing smaller quantities in the higher price and higher volatility names. So Intel’s not really my cup of tea to begin with. Was I so inclined to play here, though, I’d sell the near-money strangle, even at the seemingly cheap dollars you get here.
But I wouldn’t do it this early. I’d wait until Tuesday. Why? Because the play is on the volatility post-earnings (or lack thereof, if you sell it), not on the volatility between now and then. For that you likely are getting underpaid, in my humble opinion.
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