Wolf Option Tra...'s  Instablog

Wolf Option Trading
Send Message
I started trading back in the mid 90's while in junior high school and high school. My focus in college was on investment analysis. I have traded since the mid 90's with quite a few failures until I discovered how option trading could help me. I learned the lessons the hard way about options in... More
  • Building a core position in a disfavored stock 5 comments
    Sep 8, 2010 9:09 PM | about stocks: INTC

    INTC right now has been beaten up a little bit to much for my liking.  I have been bullish on it but not full delta's.  Primarily covered calls with some put spreads for protection from news event and broad market declines.  Am I slightly down in the position, yup, am I worried nope.  I am merely beginning my second tier of acquisition.  Those who dont have INTC and are looking at acquiring a long-term core position can be a step ahead of me in cost average as they are doing their first tier versus my second tier.

    Either way lets ponder some negative scenarios for INTC as well frankly its always good to have a "bad fundamental outcome view" to know what your getting into.

    Lets call future earnings of INTC down from $2.00 (consensus the last time I looked for next years earnings) down to an even $1.25.  This should encapsulate a flat to weakening economy and a slowdown in "pc demand".  For a company like INTC I would apply a 8 PE multiple for recessionary times, 11 flatish times and 16 for bullish times.  Target prices then go out to $10, $13.75, $20 of a $1.25 earnings per share.  I think I am pretty conservative in these estimates and marks.  All the better.

    So given my view of flattish Japan style economy $13.75 would be my "first entry".  But what if I am wrong about the earnings estimates and they do come in at $2.00.  Then INTC target would be at $22 well above the $13.75.  This presents a quandry of taking action now versus sticking to you targets.  Well lets have our cake and eat it too.

    Acquiring INTC through a ladder of time and option trades will allow one to provide better entries than currently while providing upside gains. 

    Scenario assumption assumes Investor A wants around 1,000 shares in the end but at lower market prices but wants upside potential.
    Sell 1 October $17 put for a $0.38 net credit.
    Sell 2 January 2011 $16 put for a $0.69 net credit per option
    Sell 2 April 2011 $14 put for a $0.57 net credit per option.
    Buy 5 January 2011 $20 calls for a $0.50 net debit per option
    Sell 5 January 2011 $22.50 calls for a $0..13 net credit per option.

    The total net credits for the 5 option components would be $1.05.  Margin requirements will vary but lets just assume its on average $500 per put sold to start out.  So you have $2,500 in margin requirements at initiation less $105 or $23.95 up front.  Worst case is someone can only do cash secured puts and be at $7,700 (1700+3,200+2800) - $105 = $7,595. 

    All of the put sales would average out to owning INTC stock (assumption all puts assigned) at $15.19 per share.  With the ability of adding the "remaining 500 shares Investor A wanted" at lower levels. 

    Investor A however gets bullish participation if INTC earnings are better than the $1.25 or the market decines to award higher PE multiples. 

    In a bullish scenario (assumption you acquire no stock) the stock trades up to $23 per share by January expiration.  The total trade at expiration would have profits of $1.05 (original net credit) + $12.50 (5* $2.50 call spreads) = $13.55 or $1,355 (less the cost of closing out the April $14 puts which is impossible to predict but should be relatively minimal).  $1,355 / $2395 = 56.58%.  INTC stock at $17.90 up to $23 would be a return of 28.49%. 

    The punch in the gut scenario is by January 2011 expiration INTC is at $20, and your returns are looking like just the $1.05 original net credit less the cost of closing out the Apr $14 puts sold (just to close out the trade).  $105 / $2395 = 4.38% return versus INTC gain of $2.10 / $17.90 = 11.73%. 

    This structure is able to vastly outperform INTC stock in a variety of scenarios without taking on the risk of purchasing INTC right now.  

    The scenarios can break down in a wide variety of manners other than outlined above and there could be better option structures out there.

    In summary, the trade outlined above allows one to acquire INTC roughly 15% lower (if assigned on all put options) while allowing one to collect between 4.38%-56.58% returns if INTC stays between $17-23 price per share at January option expiration (less the cost of those Apr $14 puts sold in order to close out the trade).

    The trade of course can be exited out early if INTC moves up but the returns will vary depending upon the time frame and as well as how each individual option component is being traded.  

    For full disclosure, I am long INTC stock, short Sept INTC calls with a 1:1:1 put ratio trade in Oct put options ($18-17-16 strikes).  I am looking at adding to the positions via a similiar structured trade (selling additional puts and purchasing call spreads).


    Disclosure: I am long INTC stock, short Sept INTC calls with a 1:1:1 put ratio trade in Oct put options ($18-17-16 strikes). I am looking at adding to the positions via a similiar structured trade (selling additional puts and purchasing call spreads).

    Disclosure: I am long INTC stock, short Sept INTC calls with a 1:1:1 put ratio trade in Oct put options ($18-17-16 strikes). I am looking at adding to the positions via a similiar structured trade (selling additional puts and purchasing call spreads).
    Stocks: INTC
Back To Wolf Option Trading's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (5)
Track new comments
  • convoluted
    , contributor
    Comments (2503) | Send Message
    Wow! All that for INTC? Look at the JAN 2012 17.50C. It has eroded significantly over the past couple of weeks. You might get some mileage out of a plain vanilla LEAP calendar or diagonal spread.
    8 Sep 2010, 10:47 PM Reply Like
  • Wolf Option Trading
    , contributor
    Comments (144) | Send Message
    Author’s reply » Convoluted,


    Its not that complicated just some short puts and a covered call spread. Sometimes I agree with calendars or diagonals but with INTC trading at $17.90 and that Jan 2012 $17.50 call is going to cost you $2.64.


    If you try to write any diagonal or calendars you have to write the short options at or above $20. Those dont fetch all that much premium and then your limiting upside potential.


    Why at $20 or above? Because your deltas are actually negative by doing the calendar or diagonal concept and then your prone to price risk in a sudden increase. You could continue to write the position but then your exposing the position to more risk than it originally entailed as your taking a loss on the shorter term contract.


    The point of the position is to be cautious about entering into the position because the fundamental possibilities could warrant much lower prices. However your fundamental possibilities may be wrong so how can you also participate to the upside.


    Unless I am very confident about the price direction I do not like pure directional plays and by choosing the January 2012 $17.50 calls your limiting your ability in doing the calendars and diagonals you mentioned due to the skew in the deltas.


    Also with my strategy you can continue to "roll" the positions as if the October series of puts expire worthless then you can sell Nov and so on and so forth to maintain that same 500 share exposure. Generating additional profits at no additional risk than the original position entailed.
    9 Sep 2010, 02:00 AM Reply Like
  • convoluted
    , contributor
    Comments (2503) | Send Message
    Wolf, you've crafted an excellent strategy, and your reasoning is right-on. I was fortunate with a call ratio front spread recently, and flipped to a more positive perspective, as the short spread was profitable. Your play should generate consistent income, so I think I'll incorporate your ideas. Send a bill to my wife, she writes the checks.
    9 Sep 2010, 08:43 AM Reply Like
  • Wolf Option Trading
    , contributor
    Comments (144) | Send Message
    Author’s reply » Convo


    Thanks, I try to pick views on stocks usually based on a bad scenario and then implement trades around that bad scenario. INTC bad scenario is just one to structure it bullishly but further down while preserving some "upside" gains.


    If you would have mentioned January 2011's versus January 2012's easily would make for a calendar set up. My only wish as the day is wrapping up is that INTC would have weekly options like MSFT does. Otherwise it was a pretty good trading day here, especially the natural gas storage report and subsequent price reaction.


    Either way remember with my strategy is that you wont "fully" capture a major up move in INTC but I dont really see anyone calling for a $30 handle on INTC and you wont really be forced to acquire any significant portion of the first tier until 15%ish lower. My upper range on INTC was $24-25 before the "Mac" acquisition which has changed to $22-23 (i would probably look at taking profits or hedging on a 21 handle) for the next twelve months because of that acquisition and economy thoughts rolling around in my noggin.
    9 Sep 2010, 04:00 PM Reply Like
  • convoluted
    , contributor
    Comments (2503) | Send Message
    Hey Wolf,
    The chip stocks seem to be universally hated at the moment. INTC is probably stuck in the mud until next earnings circus. I re-visited USO yesterday, selling some Oct put spreads, and off-setting with call spreads. Not a textbook iron condor, but designed for oil to move up modestly. Also sold MCD puts as the mini-selloff was probably overdone. Finally, I felt compelled to place a net short position on LULU, given the big earnings spike.
    My broker is currently updating their trading platform for weekly options, but I don't have access at the moment. Later.
    10 Sep 2010, 04:53 PM Reply Like
Full index of posts »
Latest Followers


  • TLT 1:2 call ratio on Nov $108-$110 fetching $0.25 net credit, end path short at $112.25 or sub 2.40% yield on 10-yr Treasury, tasty
    Sep 22, 2010
  • TLT trade (see blog), buying all short $109 calls and selling the $110's long. Closing it out for 90ish% of potential gains. See SA blog
    Sep 10, 2010
  • The widow maker or V-F settled at $0.799 representing 20.96% contango for UNG if it stayed the same
    Aug 30, 2010
More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.