Options Idea: Buy The Jan. 21, 2022 INTC 40.0 Call @ $13.90

INTC just gapped down after its last earnings release as margins tightened from almost 60% last year to 53.3%. Trouble lies ahead as well since Intel’s 7-nanometer manufacturing is delayed which will give AMD a 6 month head start to eat away at Intel’s market share. Intel has responded by initiating a huge $10 billion stock repurchase program. This is in addition to the Oct 2019 repurchase program already in place, bring total repurchases to around $20 billion.

Even though Intel is in trouble, we think there’s an opportunity for a longer-term play. Observe the historic Price/Sales ratio for Intel in the weekly view. We are buying today at 2.75. We’ve marked entries over the last few years at the 2.75 PS level. Every entry would have been successful over a 1 year holding period. The 50 week average on the PS ratio for Intel is 3.32.

Nevertheless, we like to reduce risk with options, so we are not going long in Intel. We are buying a deep in the money LEAP call on Intel today at $13.90, which gives us unlimited profit potential above $53.90 and limits our losses below $40.

Since this is such a long term LEAP call, we have 16 months (or 72 weeks) to sell monthly or weekly calls against this position. So while our current breakeven point is $53.90, we intend to lower our cost basis through the sale of out of the money shorter term calls.

This is strategy is called the poor man’s covered call. The important point is that with a $53.90 breakeven, the lowest priced call we can sell is $54. If we sell a lower priced call and INTC were to rise too quickly, the trade could lose money.

Selling next month or next week 15 delta out of the money calls should produce more than enough income to compensate us for the loss of dividends on this position and reduce our breakeven to $51, which is where Intel was trading today when we opened our long position.

Our objectives for short call income generation against this position are as follows:

• Initial Objective: $2.90 (Extrinsic Option Premium), reduces breakeven point to $51
  
• Secondary Objective: $4.55 (5 Quarters Dividends on 100 shares)
  
• Stretch Objective: $13.90 (100% of capital recovered)
  

If we complete our initial objective we’ll have recovered our extrinsic option premium, giving us the benefit of going long in INTC at no additional cost. If we complete the secondary objective we’ll have not only recovered the option premium, but also generated 5 quarters of INTC’s $0.33 dividend, making our position equal to a long position in INTC, but at 20% of the capital outlay. And our final stretch objective is to recover $13.90 over the life of this call, recovering our capital early.

Standard Exit: We exit the trade for a profit when the PS ratio on INTC approaches 4.
Early Exit: We exit the trade for a profit as soon as INTC has recovered the 50-week moving average.

20-INTC-03

• Opening Date: Sep 1, 2020
  
• Expiration Date: January 21, 2022
  
• DTE: 507
  
• IV: 35.81%
  
• IV Percentile: 69%
  
• Odds of Winning: 32.60% (before selling short calls)
  
• Odds of Losing: 67.40% (before selling short calls)
  
• Win: > 53.90 @ Expiration (before selling short calls)
  
• Loss: < 53.90 @ Expiration (before selling short calls)
  
• Reg-T Margin: $0 (long position, uses $1390 cash)
  

Chart Legend

• Green Area: 100% Win Zone. If we finish above or in the green area, we’ve made a profit on our call. This is a long call, so our potential gain is unlimited.
  
• Red Area: If we finish in this area we have a loss. The size of the red area is the size of our maximum loss. Since we’ve bought a call instead of gone long, we have no additional losses below $40.
  
• 1 standard deviation, 2 standard deviation, 3 standard deviation projections from Opening Date to Expiration Date are included.
  

Follow us here on TradingView to get updates as we adjust this trade with the short calls we will be selling against this position.

Trade active:

9/10/2020 Sold 1 INTC Sep 25 2020 53.5 Call @ 0.2

Trade active:

9/18/2020 Bought 1 INTC Sep 25 2020 53.5 Call @ 0.04
9/18/2020 Sold 1 INTC Oct 2 2020 53.0 Call @ 0.21

Trade active:

9/25/2020 Sold 1 INTC Nov 20 2020 52.5 Call @ 1.57

Trade active:

9/28/2020 Bought 1 INTC Oct 2 2020 53.0 Call @ 0.05
9/28/2020 Sold 1 INTC Oct 16 2020 53.0 Call @ 0.39

Trade active:

Total income generated: $251.
Breakeven is now $51.14.

Trade active:

10/8/2020. The correction is over, so we need to get out of our covered call. Sold 1 INTC Oct 16 2020 53.0 Put @ 0.69 to defend the call.

Comment:

10/13/2020. Intel still moving higher. Sold 1 INTC Nov 20 2020 52.5 Put @ 1.98 to defend our Nov 20 call.

Comment:

10/14/2020. Our put defended our Oct 16 call and we were able to close the straddle breakeven, without a loss or taking assignment.

Bought 1 INTC Oct 16 2020 53.0 Call @ 0.88
Bought 1 INTC Oct 16 2020 53.0 Put @ 0.2

Trade active:

Trade active: Total income generated: $410 / Breakeven: $49.90