Intel's Options Are Cheap

| About: Intel Corporation (INTC)

Summary

Implied volatility is making new 52-week lows.

Studies show that implied volatility is mean reverting.

Even a "Beta" stock can provide Alpha via options.

Following the release of Intel's (NASDAQ:INTC) earnings on Tuesday, implied volatility of Intel's options fell close to, or made, 52-week lows, depending on the maturity of the options.

Click to enlarge

Source: IVolatility.com

The above chart only included data up to April 19th. Here is the data for the middle of the trading day, after the earnings release the previous evening.

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Source: InteractiveBrokers

The July 2016 and January 2017 option maturities for Intel have now made life of contract, implied volatility lows.

Right now, one is more likely to benefit from being long INTC volatility than short it. This is because quantitative studies have shown implied volatility to be mean reverting.

One gets long volatility typically by buying a combination of puts, calls, or stock so that the position is delta neutral. The the position makes or loses money by the movement up or down in the options implied volatility or "Vega".

Of course, there is a catch to owning options, and that is the value lost over time. Known in the options world by the term "Theta".

Here is a snapshot of Intel's January 2017 32 strike call and put.

Click to enlarge

Source: InteractiveBrokers

If one bought a January 2017 32 call & put, or "Straddle", then the options position would be almost delta neutral, Intel is trading around the strike price, at .51 + -.503 = .007. So the options will not move much from price direction.

However, Vega for the position is .108 + .108 = .216 which means that for every move up, in implied volatility, the straddle would gain $21.60, and every move down it would lose -$21.60.

Now, every day each option would loose a little bit value, or

Theta -.0048 + -.0039 = -. 0087 or just under a penny each day (Also, Theta is not a linear function and will increase as the option gets closer to expiration).

It is unlikely that implied volatility of Intel will drop much further, but of course it still could. The question then becomes how fast will implied volatility revert to its mean?

Look at this theoretical example; if you think Intel's Vega will move up 2.5 points in 10 days, then, 2.5 * $21.6 = $54, you have to subtract the value lost in Theta, a penny a day is $1 per contract, or $10 over ten days.

So $54 - $10 = $44, then you have to subtract commissions. I typically pay around $1 a contract. One has to buy two contracts to get in the position and sell two contracts to get out of the position, for a total of about $4.

$44 - $4 = $40 theoretical profit

The position could probably be entered for around $4.80 or $480.

$40 / $480 = 8.33%

However, if the position only mean reverts 1 point over 20 days, then the gain in Vega would be offset by a loss in Theta, and the position would be a net looser, after paying commissions.

I have previously written that I think Intel is only a "Beta" stock; however, that does not mean that one can't add Alpha via its options.

In trading options, one does have to have a plan since you are trading three things: direction, volatility, and time. Direction can be neutralized by having a delta neutral position. Then one only has to think about volatility and time.

One can use this options calculator to estimate theoretical values using different prices, time, and implied volatilities.

If one typically sells implied volatility, do recognize that, from a historical viewpoint, there is not much downside left in Intel's options. Your edge from Theta decay will be there, but there is not much left from Vega dropping.

  • Just because one has a neutral or negative view on a company does not mean that Alpha can't be mined from the options on this company.
  • Covered call writers should expect lower incomes
  • Trading options is only for very high risk speculators who are educated in options theory and mathematics.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in INTC over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no positions in any stocks mentioned, but may initiate a long or short position in Intel over the next 72 hours. I am also long & short both calls and puts in Intel.