Just a few weeks ago I suggested short term traders should hold off buying Intel Corporation (INTC) shares, or opening bullish option strategies, until the implied volatility of the company's options rose to a level which suggested a surge in fear, and bearishness. I can now say that such an event has occurred.
First a look at two charts for Intel. Traders will note the stock found good support at $19.50 recently, at the base of two bottoms dating back to 2011:
The rally over the last few weeks should have assuaged fears by bears that Intel shares were destined for far lower prices. However, the opposite has occurred: the implied volatility in Intel shares has risen over the last few weeks:
The "Intel fear index," as we might call the yellow line above, is now to levels where it has peaked in the past. But, the important difference between some of those peaks (July and early October, for example) and the current surge is the latter has occurred while prices are rising. This divergence suggests bears still are unconvinced by recent price strength; contrarian evidence that the share price probably has further to go on the upside, limited downside, or both.
Thus I suggest the following bullish put spread on the shares:
- Buy 10 January 20 puts @ at .26, $260 cost
- Write 10 January 21 puts @ at .58, $580 income
This provides a net credit of $320. Your maximum loss, $1000, occurs if Intel shares are below $20 a share at expiration; offset by the net credit, your total loss would be $680.
The options expire on January 19th, two days after the company reports earnings for the 4th quarter. Notice how implied volatility collapses after earnings releases in the past: April, July, and October all saw drops of 5% or more. Since both put prices will fall as IV tanks, this greatly improves odds of your showing gains on this trade.
This credit spread provides the short term trader with all kinds of, um, options if I may say so.
- If the price continues to recover you pocket the income. In the meantime, decide if you should pursue possible further gains if the earnings report is better (or for Intel, less bad) than expected.
- If the shares continue to tank, your losses are limited by owning the puts at $20.
- Perhaps most interesting, if the shares find support near recent levels, completing a successful test the November 19th lows, you have the chance the shares will be put to you at @ $21 just in time for the start of a sustained rally.
You have two days to chomp on all this after the January 17 latest earnings report!
Successful traders know that the key to gains is to be able to profit from a variety of market scenarios. The increase in option volatility for Intel at the same time prices have shown some strength, is providing traders with exactly that opportunity.
Disclosure: I am long INTC. I own shares on INTC as part of the PowerShares QQQ trust.