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This Industry Heavyweight Faces Changes

This Industry Heavyweight Faces Changes

Investors sometimes think of industry leaders as static companies which tend to do well over time. In recent years, GE demonstrated the problem with that thinking. Now, it’s possible Intel (Nasdaq: INTC) faces challenges that could reverse its fortunes, at least partially.

Reuters recently reported that “Intel Corp is exploring strategic options for its modem chip business, including a possible sale to Apple or another acquirer, according to the Wall Street Journal, citing people familiar with the matter.

Intel decided to exit the 5G modem chip business last week, hours after Apple settled a longstanding legal dispute with Qualcomm Inc, a key supplier of iPhone modem chips.

Apple had held talks with Intel around last summer and continued to do so for months until halting recently around the time of its settlement with Qualcomm, the WSJ report said.

Intel has already received expressions of interest from a number of parties and has hired Goldman Sachs Group Inc to manage the process, which was in an early stage, the report said.

Apple, Intel and Goldman Sachs declined to a request from Reuters for comment.”

Shares of Intel fell on the news.

INTC daily chart

Earnings Add to Concerns

The company also recently announced earnings and as Market Watch reported,

“Intel topped Wall Street estimates for the first quarter but said it expects adjusted earnings of 89 cents a share on revenue of about $15.6 billion for the second quarter, $4.35 a share on revenue of about $69 billion for the year.

That was way below what Wall Street had been forecasting: $1.01 a share on revenue of $16.86 billion for the second quarter, and $4.50 a share on revenue of $71.04 billion for the year, according to analysts polled by FactSet.

On Thursday, analysts had lowered their forecasts to a consensus 91 cents a share on revenue of $15.74 billion for the second quarter, and $4.34 a share on revenue of $69.13 billion for the year.”

The longer term chart shows how significant the recent reversal in the stock price could be. The decline undercuts important support that dates back to early 2018 and could mark the end of an extended rally in the stock.

INTC weekly chart

The magnitude of the recent decline also demonstrates a potential shift in sentiment with traders no longer viewing Intel as a company with steady performance and strong financials. They could worry about this being the next GE or at least a long term under-performer in the market.

A Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

A Bear Call Spread in INTC

For INTC, we could sell a May $52.50 call for about $1.20 and buy a May $55 call for about $0.40. This trade generates a credit of $0.80, which is the difference in the amount of premium for the call that is sold and the call.

Remember that each contract covers 100 shares, opening this position results in immediate income of $70. The credit received when the trade is opened, $80 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $170. The risk can be found by subtracting the difference in the strike prices ($250 or $2.50 times 100 since each contract covers 100 shares) and then subtracting the premium received ($80).

This trade offers a potential return of about 47% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if INTC is below $52.50 when the options expire, a likely event given the stock’s trend.

Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $170 for this trade in INTC.