Intel: Crash Protection Kicks In

|
About: Intel Corporation (INTC)
by: David Pinsen
Summary

Last month, I presented two ways Intel shareholders could limit their risk in the event Intel shares declined.

Since then, Intel shares have dropped more than 19%.

Here, I show how the Intel hedges from last month have ameliorated that decline and briefly discuss courses of action for hedged Intel longs now.

Intel promotes its 5G capabilities (photo via Intel's Twitter account).

Crash Protection Kicks In For Intel

Last month, I presented two ways Intel (INTC) shareholders could protect themselves in case Intel shares collapsed. Since then, shares of Intel are down more than 19%.

Chart Data by YCharts

Let's look at how the hedges ameliorated that slide and briefly discuss courses of action for hedged Intel longs now.

The April Optimal Put Hedge

On April 5th, these were the optimal, or least expensive, puts to hedge Intel against a greater-than-19% drop by mid-October (screen capture via the Portfolio Armor iPhone app).

Optimal Put hedge for Intel via Portfolio Armor.

Note that the cost was $1,850 or 3.33% of position value (calculated conservatively, using the ask price of the puts).

Let's look at how that hedge has reacted to the 19.17% drop.

How The Optimal Put Hedge Has Reacted

Here's an updated quote on those puts as of Monday's close (via CBOE):

How That Hedge Ameliorated Intel's Drop

INTC closed at $55.60 on April 5th. A shareholder who owned 1,000 shares of it and hedged with the puts above then had $55,600 in INTC shares plus $1,850 in puts, so the net position value was $55,600 + $1,850 = $57,450.

INTC closed at $44.76 on Monday, May 13th, down more than 19% from its close on April 5th. The investor's shares were worth $44,760 on Monday, and the put options were worth $6,475, using the midpoint of the spread. So, the net position value as of Monday's close was $44,760 + $6,475 = $51,235. $51,235 represents a 10.8% drop from $57,450.

The April Optimal Collar Hedge

On April 5th, this was the optimal collar to protect against a >19% drop in INTC by mid-October, while not capping your possible upside at less than 12% by then.

Optimal Collar Hedge for Intel via Portfolio Armor.

In this case, the net cost of the hedge was negative, meaning you would have collected a $470 net credit, assuming, conservatively, that you bought the puts and sold the calls at the worst ends of their respective spreads.

How That Optimal Collar Hedge Has Reacted

Here's an updated quote on the put leg of the collar (note that it's at a different strike than the first hedge):

And here's an updated quote on the call leg:

How That Hedge Ameliorated Intel's Drop

Recall that INTC closed at $55.60 on April 5th. A shareholder who owned 1,000 shares of it and hedged with the collar above then had $55,600 in INTC shares, $880 in puts, and if the investor wanted to buy-to-close the short call position, it would have cost him $1,350. So, the net position value on April 5th was ($55,600 + $880) - $1,350 = $55,130.

Since INTC closed at $44.76 on Monday, May 13th, the investor's shares were worth $44,760, the put options were worth $3,400, and it would have cost $80 to buy-to-close his calls, using the midpoint of the spread in both cases. So: ($44,760 + $3,400) - $80 = $48,080. $48,080 represents a 12.8% drop from $55,130.

More Protection Than Promised In Both Cases

Although Intel had dropped by about 19.17% from April 5th to May 13th, and both hedges were designed to protect against a >19% drop, the optimal put hedged position was only down 10.8%, and the optimal collar hedged position was down 12.8%. In both cases, the time value of the put options gave a bit more protection than promised since the hedges were structured to protect based on intrinsic value alone.

What Now?

That's up to you, and it will probably depend in part about your view of the broader market turmoil now, but the nice thing about being hedged is that it gives you options (no pun intended). You don't have to worry so much about how much further Intel might drop because your downside is strictly limited. You can exit now, for a smaller loss; you can buy-to-close the call leg of your collar to remove your upside cap, if you're bullish; and if you're even more bullish, you can sell your appreciated puts and buy more Intel shares. In any case, you have breathing space to let the dust settle and decide on your best course of action, without the anxiety of an unhedged investor.

Disclosure: I/we 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.