Intel: Semiconductor Value with Options

Since we are beginning to see some quality stocks approach and, in some cases, rise above their downtrend lines, we think is about time to start looking at some world class companies offering good value at current prices.

Intel Corporation (INTC) (13.80)

Intel Corporation makes and markets integrated circuits for computing and communications industries worldwide. Its microprocessor products, including multi-core processors, quad-core microprocessors, 32-bit architecture microprocessors, and 64-bit architecture microprocessors.

The current quarterly dividend rate is .14 for an annual rate of .56 or 4.0% at the current stock price. With a debt to equity ratio of just .61, $2 per share in cash and a book value of $7 per share INTC offers good value even while considering the production and sales cutbacks they will be facing in the short term.

The stock has a current Historical Volatility of 79 and with the options Implied Volatility Index Mean at 61 with a long-term forecast of 40 consider one of these alternatives to sell the higher current options implied volatility.

• Sell INTC Jan 12 ½ put NQMV .765 IV 68.59 Delta .2993

At the current price this position is the equivalent of being long 30 shares of stock.

The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Monday should be about .73 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .30 for each point change in the stock price. With considerable options volume the bid/ask spreads are very close thereby facilitating options trading strategies.

The sale of a put could be the first step in a covered call strategy. If the stock is below the sold strike price at the expiration of the put in January then the stock will be assigned the basis in the stock would be 11.77 below the last pivot low at 12. In this event calls can be sold against the long stock further reducing the basis.

For those more interested in a longer-term strategy to take advantage of the current higher implied volatility while collecting dividends then perhaps this covered call idea would be the way to go.

• Buy 100 shares of INTC at 13.80
• Sell INTC Apr 15 call NQDC 1.485 IV 57.56 Delta .4793

The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Monday should be about 1.463 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .48 for each point change in the stock price.

With the credit from the call sale and including the expected February dividend payment of .14, if the stock were called away at the April expiration at 15 the return on investment would be 23% or 59% annualized rate. If the stock is still below 15 in April then there will be another opportunity to sell another call, and collect another dividend further reducing the cost basis in the stock.

With a good stock dividend rate and with a few option enhancements the potential return on investment with this quality company could be very attractive.

Disclosure: no positions

Comments

[jepittman:]

Why not just buy the thing, sock it away for three or so years and collect the dividend? Your pick of INTC is likely a good one. The option things probably are too. Just a little too much action for me.

2008 Dec 02 08:04 PM

[granger:]

good stuff, thank you for the ideas. I am always looking to be hedged in some way. Keep it coming.

2008 Dec 06 04:34 AM