It doesn’t take a genius to understand that chipmaker Intel ($INTC) is a tricky idea. Even before a disappointing second-quarter earnings report, INTC stock struggled for traction. However, when the ugly print came out in public view in early August, shares of the once-proud technology giant cratered. Since the start of the year, Intel shares are down roughly 57%. Analysts rate it a Hold and that’s where I stand too: Intel is a massive brand but it has severe challenges.
Let’s quickly look at the Q2 results. As TipRanks’ Ebube Jones mentioned, Intel generated only $12.83 billion in revenue, down 1% against the year-ago quarter and below experts’ consensus view of $12.94 billion. On the bottom line, Intel posted adjusted earnings per share of 2 cents, well beneath the expectation of 10 cents.
Now, it’s true that artificial-intelligence-related demand has skyrocketed and that has added some recent excitement for INTC stock. However, as Jones pointed out, Intel’s efforts in this space have fallen flat relative to the competition. The company’s delays in advanced semiconductors don’t help matters. Intel has potential but it has a long road ahead to reestablish credibility; hence, the neutral sentiment on my part.
‘Pacifist’ Approach Can Still Earn Profits from INTC Stock
By engaging in the options market, investors can make hay through a variety of multi-leg transactions with a largely neutral view like mine. Today, we’ll explore what’s known as a net debit vertical options spread. Essentially, we’ll receive a credit from a sold option to defray some of the costs of our bought option (debit).
Another point about neutrality — or the Hold sentiment — is that nothing is ever perfectly evenhanded. It’s very possible that within a largely horizontal trading range that a security can bounce up and down. With INTC stock, I anticipate a soft move higher, with the risk of downside volatility. Therefore, the most prudent options strategy at this hour may be the bull call spread.
The structure of the bull call spread is alluded to above: buy a call (debit) at a lower strike price and simultaneously sell a call (credit received) at a higher strike price with the same expiration date. The credit will defray some but not all of the cost of the bought call; hence the term net debit. For reference, there are vertical spreads where the debit caps the risk associated with a credit strategy, which are called net credit multi-leg options.
Setting Up the Vertical for Intel Options
With options, merely expressing a Hold sentiment isn’t descriptive enough. You have a plethora of ideas to choose from, especially with a high-profile, high-volume entity like INTC stock. That said, a relatively conservative idea involves calls expiring Sept. 27, 2024: specifically, buying the $19.50 call and selling the $21 call. At time of writing, the underlying premiums landed at $1.60 and $0.59 per contract, respectively.
As is, this bull call spread requires us to pay a net cost of $1.01 ($1.60 premium paid minus $0.59 premium received). This figure, or $101 when multiplied by 100 shares, also represents the maximum amount we can lose if this trade doesn’t work in our favor. On the other end, the maximum profit is $0.49 cents per contract (or $49). This comes out to the difference between the strike prices minus the net debit we paid.
The other significant figure to pay attention to is the breakeven price of $20.51. That doesn’t give much margin relative to Wednesday’s closing price of $20.77. However, if you anticipate that INTC stock will inch forward from here on out — not a wholly unreasonable proposition given its recent positive momentum — the bull call spread can be a powerful tool.
Why You Should Consider the Bull Call Spread
Naturally, the question may come up as to why investors might want to consider a bull call spread as opposed to a straight call option. There’s a straightforward answer: with counterbalancing sentiment at play, INTC stock isn’t the easiest idea to speculate on. With a vertical spread, market participants can define their risk-reward profile.
The other major consideration is the entry cost. If we were to buy the $19.50 call straight up, it would cost $1.60 per contract, as previously mentioned. That’s $160 when multiplied by 100 shares. With a bull call spread, your initial outlay is 37% less for a hedged call.
As a reminder, the $101 spend bull call spread represents the maximum amount you can lose per contract. It’s true that there’s an offset here; by selling the higher-priced call, your reward maxes out. Nevertheless, since the only thing certain about INTC stock seems to be uncertainty itself, a conservative bull call spread looks like an appealing proposition.
Wall Street’s Take on Intel
Turning to Wall Street, INTC stock has a Hold consensus rating based on one Buy, 26 Holds, and seven Sell ratings. The average INTC price target is $25.47, implying about 20% upside potential.
The Takeaway: An Armistice in INTC Stock Can Still Yield Potential Profits
While Intel has been making strides in the market, it’s also difficult to ignore that the business faces broader risks, especially after a poor Q2 earnings report. Nevertheless, the recent brewing excitement from corporate actions warrants a modicum of respect. Given the clashing of sentiment, a conservative bull call spread — which provides a discount to the debit paid for a call option — may be the best play.
