How To Amplify Intel's Returns Each Month

Oct. 5.12 | About: Intel Corporation (INTC)

Let's be frank - Intel's (NASDAQ:INTC) 4% yield wouldn't be enough to justify its purchase if we thought INTC was going to trade flat. Clearly it's better to make 4% than to lose money, but there's another thing to consider - the upcoming explosion in dividend taxes in the USA.

We're used to having 15% taxes on our dividend income, but due to our government's spending habits we're probably going to see a truly ridiculous jump to 43% starting 2013. That's right - Intel's 4% dividend is now a 2.3% yield in your pocket. That doesn't do anything for the "real" value of your portfolio if you consider inflation, does it?

There's been some bullishness about Intel in reaction to Wall Street's dislike of the stock due to its exposure to the PC industry and weak exposure in mobile. This article that recently appeared on Seeking Alpha set an ultra-high price target of $35, for instance. I contributed my own interpretation, which didn't set a price target but implied an eventual return to its old prices (just under $30/share).

If you don't believe that Intel is going to return to those levels, there's another strategy that can make INTC a great buy for your portfolio - covered calls.

Options are painted by most as absurdly volatile and dangerous vehicles for investing - which is true most of the time. Buying naked positions can result in enormous losses of wealth in very short periods of time, much like those highly leveraged positions that forex traders play with. Still, there is one very conservative options strategy called a "covered call" that can boost your returns on INTC by a huge margin if utilized properly.

If I lost you, check out this link. You should know that an option is the right to buy or sell a stock at a defined price. US options expire on the third Friday of the month that is defined on the contract. If you are selling covered calls, you have shares (let's pretend we have 500 shares of INTC). Each contract is the right to buy/sell 100 shares of whatever company we are interested in.

If you sell 5 call options, you've sold the right to buy your INTC shares at a certain price. This wouldn't be worth it for the seller if it weren't for premiums - which are embedded in the market prices of the actual contracts. They vary quite a bit, and you have to look for deals.

I took a screenshot of the October 2012 options that are being offered today. They expire on October 19th.

Click to enlarge

Assuming that you have the ability to write/sell options to the many INTC options traders out there, you have some good options (no pun intended) to make some passive income.

Since some options are very thinly traded, you'll notice that some deals are awful (while some are terrific). For instance, you wouldn't want to sell October 2012 calls at the $20 strike price right now, because you only get a premium of 2-3 pennies per share. Notice that the $23.00 call options look quite attractive here - you are basically selling your INTC for $23.14 (a nice 1.6% above INTC on the NASDAQ).

You can sell longer-term contracts if you want, but you almost always get more money from the premiums if you consistently sell short-term contracts.

It does require a little work, but you will beat the snot out of the standard 4% yield using covered call strategies on INTC. Since the dividend tax hike is probably going to hit us as early as next year, there's not much of an advantage for dividend investors anymore.

If your INTC shares fall to, say, $20/share, those call options expire worthless and you get to keep the money. There's no investment strategy that carries zero risk, but covered calls on a decent stock like INTC is very favorable in terms of risk and reward.

Happy trading!

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