Intel: Replacing The Stock In Case Of A Market Decline

| About: Intel Corporation (INTC)

I like Intel Corp., (NASDAQ:INTC) and I like its stock, stock price (at $26.88 as of 8/10/12 close) and dividend yield. The forward earning potential of the company is also good in my opinion but the economic hurdles we could face would end up derailing the stock from its current prices.

2013 Consensus Estimates from Analysts range from a low of $2.22 to $2.85 earnings per share with an average of $2.55. Based on the EPS of $2.22 this would recent in a P/E of roughly 12.1. In a worsening economic environment I would probably put the low EPS at $1.80 for conservative purposes which would result in a P/E of 14.93. Just providing that as a reference point to get people thinking of why it may be prudent to replace the stock with options.

The only benefit to owning the stock right now is the 3.40% dividend yield and upside price expectations that could be possible. The dividend amounts to only $0.225 per quarter; which wouldn't even compensate for a bad day's move in the market.

So while I like the stock and think there is upside market potential I think there are broader market risks that can drag down Intel Corp. Investors can look towards Intel Corp. options market to eliminate risk to owning the underlying shares.

The investor would sell the shares of INTC and replace their current holdings (say 1,000 shares as an example) with the following option trade.

Short 5 January 2013 $24 puts for $0.70 net credit. Short 5 January 2013 $20 puts for $0.21 net credit. This would allow the investor to collect $455 in premiums or $0.455 per share and would in the worst case force the investor back into their original 1,000 shares but at an average cost of $22 per share (not counting the net credits). The investor could look at the net credit as being the dividend replacement for letting go of the shares.

This would represent an improvement in cost average from 26.88 to $22.00 or 18%.

The risk with that conservative trade is that the market rallies and INTC moves back up and makes a new 52-week high above $30 per share and the investor would only make the $26.88 sell point plus $0.455 per share.

The investor that fears missing a move to $30 or higher could look at buying January 2013 or later dated call options or call spreads to capture a portion of that move.

At this point I think it could be more prudent to think about risk management in a downside market scenario rather than upside potential lost by letting go of the underlying shares of Intel Corp.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.