This strategy also forces me to buy more Intel if the stock drops, but I'm happy to do that. In most scenarios, a drop in Intel would be the result of cyclical factors. Also, any significant drop in Intel from here ($19.00) would bring out the value players who right now are buying banks, oil producers and mortgage lenders. After all, according to First Call, Intel is trading at a p/e of just over 14 against 2008 earnings, and has a dividend yield of almost 2.5%. Intel is a tech stock that looks like value.
Here's the trade I did Wednesday [Warning: It gets a bit complicated, please don't try this at home] (think TV stunt people jumping over an empty crevasse in a car that has been partially lit on fire - fun if you know what your are doing but . . .): I used shorting of options which can be dangerous for the uninitiated (and even the initiated).
I bought INTC for $18.99.
I sold an equivalent amount of $22.50 strike calls (Jan 2008 expiration) at $0.80.
I sold an equivalent amount of $17.50 strike puts (Jan 208 expiration) at $0.95.
Bought 2 times the amount of $12.50 strike puts (Jan 2008 expiration) for $0.13.
I own Intel at a net cost of $17.41 (18.99 (stock) - $0.95 (put sold) - $0.80 (call sold) + $0.13 x 2 (puts bought).
My maximum upside is $5.42/share (22.50 strike price - $17.41 cost + $0.33 dividends) or 31%.
My maximum downside is a total of $9.58 (55%).
The calculation goes like this:
$17.41 (cocktail cost) - $12.50 (put strike) = 4.91 and
$17.50 (strike of puts sold)- 12.50 (protection puts) = 5.00 [remember those extra puts]
I still get to add back dividends of $0.33 to negate part of the loss.
I suffer double losses as falls below $17.50. I have set aside some cash for the eventuality that I buy INTC and, unless something has changed (either in my portfolio, the market or the prospects of INTC), I would be happy to buy more INTC at $17.50. Buying the $12.50 puts increases my options should stock really fall due to some event that changes the company. It also means I don't have to set aside as much cash in case my $17.50 puts are assigned (I am forced to buy INTC at $17.50).
Disclosures and Confessions: I own and have been accumulating INTC. I currently hold the position described above. I do not expect to purchase more INTC at current market conditions. I also own a small (losing) position in AMD. I still don't see AMD at value because their future seems less certain than Intel.
INTC 1-yr chart: