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Tom Armistead
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I am a retired accountant, having spent the early years of my career in the insurance industry and the later part in the field of accounting. My insurance experience has given me the willingness to accept investment risk if I feel the return justifies it; also, an interest in applying risk... More
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Tom Armistead's Instablog
  • What I'm Doing With Intel 9 comments
    Nov 27, 2013 1:58 PM | about stocks: INTC

    I've spent the last several days studying Intel (NASDAQ:INTC) in the wake of the sell-off created by their analyst day guidance. I'm working on an article, which requires further work to present my thinking clearly. But I have developed an opinion, which I am expressing by means of an option trade.

    Briefly, I think the market underestimates the probability and size of potential share price movements if Intel succeeds in its effort to grow share in lines other than traditional PC's. At some point, either earnings or rumors of socket wins are likely to spike the stock. Meanwhile, it's priced at levels that are supported by the dividend and cash flow.

    Using options, a bullish risk reversal comes to mind - short Jul 2014 22 puts, and long Jul 2014 26 calls. I'm willing to hold the shares at prices below $22, and would like to own them at prices above $26. If the stock is between $22 and $26 at expiration, both puts and calls expire worthless.

    What I actually did is I bought Jan 2016 15 calls and sold a vertical call spread, the Jul 2014 22/26. This achieves the same effect as the risk reversal at expiration, but it's easier for me to manage if the situation develops unfavorably in the meantime.

    I established the position today, in my Speculative Portfolio.

    Disclosure: I am long INTC.

    Stocks: INTC
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Comments (9)
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  • LarryMelman
    , contributor
    Comments (1637) | Send Message
    I have experience with selling covered calls and cash-secured puts, and the math involved with those. But my eyes glaze over at the mention of spreads and crosses and other double-secret option strategies. Can you (briefly?) explain what you have done here? Thank you.
    27 Nov 2013, 02:52 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6294) | Send Message
    Author’s reply » Larry,


    The usual version of this trade is:


    Short INTC Jul 2014 22 puts
    Long INTC Jul 2014 26 calls


    Often the premium received is very similar to the premium paid, so the investor has no immediate out of pocket cost. Of course, he needs to have some cash to support the sale of the put.


    The point of the trade is, if the stock pops, the put will lose value rapidly, and the call will gain value rapidly. It's called a bullish reversal and it's a favorite of speculative options players. If the stock stays between $22 and $26, both puts and calls expire worthless. Under $22, the investor becomes the proud owner of the shares.


    My version is different, but the combination of being long Jan 2016 15 calls and short Jul 2014 calls acts similar to the put.


    Judging from your familiarity with covered calls and cash secured puts, you're a dividend type investor and this type of speculative trade wouldn't be your cup of tea.
    27 Nov 2013, 03:49 PM Reply Like
  • LarryMelman
    , contributor
    Comments (1637) | Send Message
    Thanks for the info. I don't follow your conclusion. I am decidedly not a "dividend type investor". I simply have yet to learn about these more complicated option plays.
    27 Nov 2013, 03:53 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6294) | Send Message
    Author’s reply » I'm sorry Larry, I wasn't trying to call you names or anything.


    I'm basically a dividend or buy and hold investor, but I like to do a few speculative trades from time to time. Of course options are handy for that type of thing.


    I've avoided the butterflies and the iron condors, etc., too complicated for me. Basically I use options to make directional bets.
    27 Nov 2013, 04:00 PM Reply Like
  • bbmaven
    , contributor
    Comments (82) | Send Message
    I actually have a similar bullish reversal in place, but am trying to sort out what buying the Jan16 leaps and selling a vertical call spread means. Does this mean that you have sold the July14 22's and bought the July14 26's?


    27 Nov 2013, 04:28 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6294) | Send Message
    Author’s reply » That's what I was trying to say. I'm self taught on options, and terminology varies, but seeing as how I received money for the spread I figure I sold it.
    27 Nov 2013, 04:38 PM Reply Like
  • amfox1
    , contributor
    Comments (27) | Send Message
    It's probably easier to use numbers.


    The Jan16 15 LEAPs cost $9 to buy. It only has $0.10 of time premium since they are so deep in-the-money, so it is a leveraged way to profit from moves in the underlying stock.


    The July 22/26 bear call spread results in a credit of approx. $2.25.


    Therefore, Tom could leg into these positions for $6.75, plus transaction costs.


    Tom's break-even on the spread is 24.25 (absent transaction costs), approx 1.5% above today's 23.90 close, and makes money below 24.25 to 22. Tom's break-even on the LEAP is 24 (absent transaction costs) and makes money above 24.


    At 22, Tom loses $2 on the LEAP but keeps the entire $2.25 credit on the spread.


    At 24, Tom breaks even on the LEAP and keeps $0.25 of the credit on the spread.


    At 26, Tom makes $2 on the LEAP but pays out $4 on the spread (net $1.75 loss, giving effect to the credit).


    Above 26, Tom will make money on the LEAP but has capped his losses on the spread.


    BTW, the risk reversal (short July 22 put, long July 26 call) results in a 0.26 credit (absent transaction costs) and therefore is break-even or better above $21.74, although the trade will not make more than the initial credit until INTC goes above 26.
    27 Nov 2013, 05:07 PM Reply Like
  • Hendershott
    , contributor
    Comments (1891) | Send Message
    INTC, flat revenues for 2014. Why fool around with this stock? It's unlikely to have a significant move for a couple of quarters.
    28 Nov 2013, 06:51 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6294) | Send Message
    Author’s reply » It's hard to know exactly when the stock will pop, if it does.


    The options strategy I'm using doesn't tie up a lot of cash, and doesn't get involved with small moves up and down.
    28 Nov 2013, 07:05 PM Reply Like
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