Thursday, June 2, 2011

Intel - Battle of the Titans!

In one corner we have Goldman Sachs.....the 800 pound gorilla, and legend on the street. Last week, they lower Intel's rating to sell and lowered its price target to $20. They citing “slowing processor shipments, rising competition and record capital spending this year”.

In the other corner we have CCI...the .8oz chimp and a legend in his own mind. CCI still believes in the bullish story for Intel and continues to look to add to the position below $22.

* * *

Intel fell back to $22 on Wednesday. Reasons might include

  • Goldman Saks publishing a downgrade last week with a price target of $20.

  • The general market pull back in response to a perceived slowing US economy

  • Technical analysts “filling the gap”

CCI has been and continues to be bullish on Intel and continues to be willing to accumulate under $22.

Yes, that puts CCI in direct conflict with Goldman Sachs. It is worth pointing out that

  • In January with Intel trading around $21, the same GS analyst was “ recommending that investors avoid INTC shares ahead of 4Q earnings as he sees risks skewed to the downside. Specifically "we see overwriting (at $22) as a way for investors to generate additional returns.” Conversely in January , CCI was suggesting it was time to accumulate under $22, even with going so far to suggest using Leaps for leverage. The stock reached $24.

  • At the risk of being cynical and a conspiracy theory kind of guy..... there is a lot of open interest in the $24 strike price, and $23 is the option “max pain” point for June. I won't try to explain max pain, but suffice it to stay that someone who wrote these options (like GS recommended) could be a looser if the price continues to rise, and there is some evidence the stock price might "pin" towards this level ($23) by option day. Of course that would imply that the street might manipulate a stock price via its trading or recommendations to improve its derivative position. How could that be...hmmm.

From a trading perspective, CCI readers will recall that June $22 calls were sold for $.84 a few weeks ago. At the time of this post, they are trading at $.45. So the portfolio is sitting on a $.39 unrealized gain. As Intel hit $22, CCI added to its Intel position by selling one lot of June $23 puts for $1.07 after commission. These options will move in opposite directions. One of three scenarios plays out if held to expiration

  • Worse case – the stock continues to fall well under $22, The portfolio harvests the $.45 remaining on the covered calls sold a month ago , and will have juiced the performance on that lot by 4%. More importantly, another lot is acquired at an effective price about $21.92. CCI thinks that is a good price. GS disagrees. We will see who is right.

  • Assumed Case or the Scenario CCI is hoping will happen - the stock holds $22 support but does not rise over $23 by June expiration. In this case one lot will be sold at an effective price of $22.8 and one will be bought at an effective price of $21.9. Swapping those lots has the potential to effectively have generated a potential $.90 trading gain (4.5%)

  • Best case – The stock bounces quickly back over $23. One lot of the stock will be called away at $22, but the portfolio will have harvested both the $.84 and $1.07 option premiums. That is an effective sales price of the lot at $23.91.

Of course, those are the scenarios if held to expiration. CCI may likely trade out of these positions if the stock moves substantially in the short term.

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