Making 27% a year on big blue tech stocks does not seem like an easy task. But more often than not, the market provides us with this type of opportunities. This time around, the opportunity at hand involves Intel Corporation (INTC).
Shares of Intel Corporation have been hit pretty hard in the past 3 months, plunging from the $27 level down to $22, a drop of almost 20%, take a look at the graph below:
It seems like investors have fallen out of love with the company. Many people now believe that PCs belong to the ancient world, and Intel - which controls 80% of the market for PC's chips- might as well join the book of history.
In my opinion, nothing could be further from the truth. Intel has an extremely successful brand name and dominance in its market. Not only that, but at a current multiple of 9.3 and a 4% dividend yield, there is really nothing to worry about. Shares of Intel will soon return to their normal trading price zone.
How to take advantage of this opportunity
When this much skepticism enters the market, the premium on options in general, and put options in particular rise exponentially. This means that investors are now able to take advantage of this scenario by selling put options and pocketing fat cash premiums on this trade.
As of this writing, shares of INTC are trading at $22.75, and the December $23 Puts are selling for $1.23. This translates into an immediate 5.3% gain on your investment by waiting 2.5 months until the December expiration.
To put it differently, investors can act as an insurance company and collect a premium of $123 for each option contract they sell. This contract, in turn, obligates them to buy shares of Intel on the expiration day of December IF shares of Intel are trading under $23.
Repeat this trade 5 times a year, and you will make 27% return annually.
How this trade plays out
There are 3 different scenarios that can happen on expiration day on December.
- Share price of Intel > $23: you get to pocket the premium and have no obligations.
- Share price of Intel = $23: you get to pocket the premium and have no obligations.
- Share price of Intel < $23: you get to pocket the premium. But you will also be obligated to buy the shares at the predetermined price of $23. Since this is a very good price to pay for the shares, we are fine with that obligation. Of course, you need to adjust the number of shares you are obligated to purchase to the trading position size that is right for you. This rule applies to any trade you make, regardless of the use of options.
Tried and true
This will not be the first time we sell options. We have done it in the past on Cisco Systems (CSCO). You can read about it here. In this case, we profited both from the premium and from the partial rise in the share price.
I will keep monitoring potential option selling trades on other big blue chip stocks like Microsoft Corporation (MSFT) and Oracle Corporation (ORCL). Often, these big names display the same anomaly in option premiums.
Sell to open the December 2012 Puts, at the $23 strike price, for no less than $1 an option.