Intel: In Face Of Headwinds, Cash-Secured Puts One Option

Shareholders in chip behemoth Intel (NASDAQ:INTC) have seen the value of their investment drop around 14.9% so far this year. By comparison, shares of major competitors, Micron Technology (NASDAQ:MU) and NVIDIA (NASDAQ:NVDA), have declined by 26.8% and 41.2%, respectively.

Intel Weekly Chart.

In addition to the sell-off on Wall Street, investors have been worried about a slowdown in personal computer demand, particularly in the consumer and education segments due to rising inflation. Metrics from the market research firm IDC point to declining PC shipments in Q1. Meanwhile, COVID-19 lockdowns in China mean significant supply-chain issues for the chip-maker.

In June 2021, INTC shares hit a most recent high of $58.41. However, shares are currently trading around a 52-week low of $43.07, down more than 20% over the past year.

How Recent Metrics Came In

INTC released Q1 figures in late April. Revenue was $18.35 billion, down 1% year over year. The Client Computing Group saw a 13% drop in revenue. Meanwhile, the Datacenter and AI Group, and Edge Group delivered 22% and 23% growth, respectively, compensating for the drop. As a result, net income came in at $3.6 billion, or 87 cents per share, a 35% YOY decline.

On the results, CEO Pat Gelsinger said:

“With a $1-trillion market opportunity ahead of us, we remain laser focused on our IDM 2.0 strategy. We executed well against that strategy in Q1, delivering key product and technology milestones and announcing plans to expand our manufacturing capacity in both the U.S. and Europe…”

Management predicts the industry will continue to face challenges in areas like foundry capacity and tool availability until at least 2024. But management kept its 2022 guidance unchanged. Intel expects to achieve revenue of $76 billion and adjusted EPS of $3.60 at the end of 2022.

Prior to the release of the quarterly results, INTC stock was around $48. But is now changing hands around $43.70. Meanwhile, the market capitalization currently stands at $178.9 billion.

What To Expect From INTC Stock

Among 45 analysts polled via Investing.com, INTC stock has a “neutral” rating, with an average 12-month price target of $52.10. Such a move would imply an upside of more than 17% from the current price. The target range stands between $74 and $37.

Consensus Estimates of Analysts Polled By Investing.com.

Source: Investing.com

Similarly, according to a number of valuation models like those that might consider P/E or P/S multiples or terminal values, the average fair value for INTC stock on InvestingPro stands at $60.12.

Valuation Models Produced By InvestingPro.

Source: InvestingPro

In other words, fundamental valuation suggests shares could increase by 35.9%.

We can also look at Intel’s financial health as determined by ranking more than 100 factors against peers in the information technology sector. In terms of cash flow health and momentum, INTC stock scores 3 out of 5. Yet, Intel’s overall score of 4 points is a great performance ranking.

At present, INTC stock looks significantly undervalued, with P/E, P/B and P/S ratios at 7.2x, 1.7x and 2.3x, respectively. Comparable metrics for peers stand at 21.1x, 8.1x and 6.0x, respectively.

Readers who watch technical charts might be interested to know that a number of INTC’s short- and intermediate-term oscillators are oversold. Although they can stay extended for weeks—if not months—the decline in price could also be coming to an end.

Our expectation is for INTC stock to range trade between $40 and $44. While it could still dip below $40, shares are likely to bounce back before too long. Afterwards, Intel shares could potentially start a new leg up.

Cash-Secured Puts On INTC

Price Now: $43.70

Investors who are not concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in INTC stock now. They could expect the shares to make a move toward $52.10, aligning with analysts’ estimates.

Those who are experienced with options could also consider selling a cash-secured put option in INTC stock—a strategy we regularly cover. As it involves options, this setup is not be appropriate for all investors.

Such a bullish trade could especially appeal to those who want to receive premiums (from put selling) or to possibly own INTC shares for less than their current market price of $43.70.

A put option contract on INTC stock is the option to sell 100 shares. Cash-secured means the investor has enough money in his or her brokerage account to purchase the security if the stock price falls and the option is assigned. This cash reserve must remain in the account until the option position is closed, expires or is assigned, which means ownership has been transferred.

Let's assume an investor wants to buy INTC stock, but does not want to pay the full price of $43.70 per share. Instead, the investor would prefer to buy the shares at a discount within the next several months.

One possibility would be to wait for INTC stock to fall further, which it might or might not do. The other possibility is to sell one contract of a cash-secured INTC put option.

So the trader would typically write an at-the-money (ATM) or an out-of-the-money (OTM) put option and simultaneously set aside enough cash to buy 100 shares of the stock.

Let's assume the trader is putting in this trade until the option expiry date of June 17. As the stock is $43.70 at time of writing, an OTM put option would have a strike of $42.50.

So the seller would have to buy 100 shares of INTC at the strike of $42.50 if the option buyer were to exercise the option to assign it to the seller.

The INTC June 17, 42.50-strike put option is currently offered at a price (or premium) of $1.75.

An option buyer would have to pay $1.75 X 100, or $175, in premium to the option seller. This premium amount belongs to the option seller no matter what happens in the future. The put option will stop trading on Friday, June 17.

Assuming a trader would enter this cash-secured put option trade at $43.70 now, at expiration on June 17, the maximum return for the seller would be $175, excluding trading commissions and costs.

The seller's maximum gain is this premium amount if INTC stock closes above the strike price of $42.50. Should that happen, the option expires worthless.

If the put option is in the money (meaning the market price of INTC stock is lower than the strike price of $42.50) any time before or at expiration on June 17, this put option can be assigned. The seller would then be obligated to buy 100 shares of INTC stock at the put option's strike price of $42.50 (i.e. at a total of $4,250).

The break-even point for our example is the strike price ($42.50) less the option premium received ($1.75), i.e., $40.75. This is the price at which the seller would start to incur a loss.

Cash-secured put selling is a moderately more conservative strategy than buying shares of a company outright at the current market price. This can be a way to capitalize on the choppiness in INTC stock in the coming weeks.

Investors who end up owning INTC shares as a result of selling puts could further consider setting up covered calls to increase the potential returns on their shares. Thus, selling cash-secured puts could be regarded as the first step in stock ownership.

The current market makes it harder than ever to make the right decisions. Think about the challenges:

• Inflation
• Geopolitical turmoil
• Disruptive technologies
• Interest rate hikes

To handle them, you need good data, effective tools to sort through the data, and insights into what it all means. You need to take emotion out of investing and focus on the fundamentals.

For that, there’s InvestingPro+, with all the professional data and tools you need to make better investing decisions. Learn More »