Option Play To Get A 12% Return On Intel With Some Margin Of Safety

| About: Intel Corporation (INTC)

Thursday's market is providing a decent follow up today to yesterday's massive rally. With QE3 rumors pushing and pulling on the market and Europe being on every investor's mind as well as an upcoming election, I think we will see a higher level of volatility in the last half of the year than we had to begin 2012. I also think there is decent probability we end the year not too far off of current levels. Given that outlook, I believe option strategies on high quality stocks is one way to outperform the market with some margin of safety. It is a smart strategy for investors who are content with "singles" right now. One stock I have done this with is Intel (NASDAQ:INTC)

Option Strategy: Sell the January 2013 25 puts on INTC for $1.90

Outcome 1: Intel stays above $25 at the expiration of the option on January 19th and the investor picks up the $1.90 premium for an annual return of over 12 1/4%

Outcome 2: Intel dips below $25 and the stock gets "put" to the investor for a cost adjusted $23.10 ($25 - $1.90).

"Intel Corporation designs, manufactures, and sells integrated digital technology platforms primarily in the Asia-Pacific, the Americas, Europe, and Japan." (Business description from Yahoo Finance)

4 reasons Intel should hold the $25 level:

  • Intel's A+ rated balance sheet and over 3% dividend yield puts a nice floor under the stock.
  • The stock is selling near the bottom of its five year valuation range based on P/E, P/B, P/S and P/CF.
  • Intel has a forward PE of under 10, significantly under its five year average (15.3).
  • Intel's rollout of its Atom chip for mobile and Ultrabook growth should keep revenue growth nicely humming along. Analysts expect 6% to 8% sales growth for both FY2012 and FY2013 and the stock has a five year projected PEG of less than 1 (.79)

Disclosure: I am long INTC.