Intel’s Been Here Before
New reports were incredibly technical, but the bottom line is that Intel (Nasdaq: INTC) has a problem. There is a significant vulnerability in its processors. All operating systems running Intel chips will have to be updated including Linux distributions, Windows and macOS.
This bug appears to be significant. The bug allows normal user programs to access the protected memory in the kernel. A kernel is the core of an operating system. It’s a process that handles the most sensitive tasks in your system.
There is a patch for the bug. But, based on testing experts believe computers running Intel chips are going to be slower by 5% to 30%. Operating system vendors are currently working towards redesigning some of the core functionalities of your computer as a workaround.
Why This Is Important
The kernel controls the interaction between an application and the file system. It’s basically the gatekeeper that is going to allow a program to read and write files. It also manages memory and peripherals, such as your keyboard and your camera.
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Interactions between user processes and the kernel have been made as efficient as possible through various hardware and software optimizations.
According to Bloomberg, all modern microprocessors, including those that run smartphones, are built to essentially guess what functions they’re likely to be asked to run next. By queuing up possible executions in advance, they’re able to crunch data and run software much faster.
The problem is that this predictive loading of instructions allows access to data that’s normally stored securely. It’s possible that malicious code could find a way to access information that would otherwise be out of reach, such as passwords.
For example, if an attacker can find a way to install a normal program on your computer, they could then be able to read passwords stored in the kernel memory, access your private encryption keys, and read files cached from the hard drive.
Risks are not limited to your system. Many cloud hosting platforms, such as Amazon Web Services, Microsoft Azure and Google Cloud Platform share computer resources between multiple clients. With this bug, it is possible one client could access sensitive information about another client using this kernel exploit.
Intel is working with Microsoft, Apple and Linux teams to find a solution. Microsoft has been working on a patch since November. Apple is also working on a similar fix.
The bad news is that the Kernel Page Table Isolation fix makes everything run slower on Intel x86 processors. AMD said that its processors are not subject to the vulnerability. So, if your computer appears slower than it should be, it’s because it is.
Potential Impact for Intel
We have one precedent that seems applicable to this event. In 1994, a college professor discovered a problem with how early versions of Intel’s Pentium chip calculated numbers. Intel had to recall some chips and took a charge of more than $400 million.
Below is the chart of the price action around that time. The news did seem to create some volatility in the stock, at least at first glance.
In the next chart, the S&P 500 has been added to the chart so that we can determine how Intel’s stock moved in relation to the broad market.
Intel moved mostly in line with the stock market in 1994. There seemed to be no significant impact from what was then known as the Pentium FDIV bug.
Trading This Latest Bug
The bad news is now out and Intel is expected to address the bug soon. The statement should be expected to soothe investor concerns and Intel could rally on that news.
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
For INTC, a bull put spread could be opened with the January 12 put options. This trade can be opened by selling the January 12 $44 put option for about $0.30 and buying the January 12 $42 put for about $0.10.
This trade would result in a credit of $0.20, or $20 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $2 ($44 – $42). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $180 ($200 – $20).
The potential gain is about 11.1% of the amount of capital risked. This trade will be for about one week and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.