How To Buy INTC Stock For An 11% Discount, Or Achieve A 28% Return

Selling cash secured puts on stocks an investor is happy to take ownership of is a great way to generate some extra income.

A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.

The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price.

It’s important that anyone selling puts understands that they may be assigned 100 shares at the strike price.

Why Trade Cash Secured Puts?

Selling cash secured puts is a bullish trade but slightly less bullish than outright stock ownership.

If the investor was strongly bullish, they would prefer to look at strategies like a long call, a bull call spread, or a poor man’s covered call.

Investors would sell a put on a stock they think will stay flat, rise slightly, or at worst not drop too much.

Cash secured put sellers set aside enough capital to purchase the shares and are happy to take ownership of the stock if called upon to do so by the put buyer.

Naked put sellers, on the other hand, have no intention of taking ownership of the stock and are purely looking to generate premium from option selling strategies.

The more bullish the cash secure put investor is, the closer they should sell the put to the current stock price.

This will generate the most amount of premium and also increase the chances of the put being assigned.

Selling deep-out-of-the-money puts generates the smallest amount of premium and is less likely to see the put assigned.

INTC Cash Secure Put Example

On October 3, with Intel (INTC) trading around $27, traders could sell a January 20 put option with a strike price of $26.

For selling this put, the trader would receive around $200 in option premium.

In return for receiving this premium, they would have an obligation to buy 100 shares of INTC for $26. By January, if INTC is trading for $25, or $20, or even $5, they still have to buy 100 shares at $26.

But, If INTC is trading above $26, the put option expires worthless, and they keep the $200 option premium.

The net capital at risk is equal to the strike price of 26, less the 2.00 in option premium. So, if assigned, the net cost basis will be 24. That’s not bad for a stock currently trading at $27.

That’s a 11% discount from the price it was trading yesterday.

If INTC stays above $26, the return on capital is:

$200 / $2400 = 8.33% in 108 days, which works out to 27.91% annualized.

This trade either achieves a 27.91% annualized return, or results in buying a high dividend stock for a 11% discount.

You can find other ideas like this using the Naked Put Screener:

Company Details

The main downside with this trade is that Intel is currently rated a 100% Sell with a strengthening short-term outlook on maintaining the current direction. So this would very much be a contrarian trade.

Of 22 analysts covering INTC, 1 has a strong buy rating, 1 has a moderate buy, 14 have a hold rating, 1 has a moderate sell and 5 have a strong sell rating.

Intel Corporation, one of the world's largest semiconductor company and primary supplier of microprocessors and chipsets, is gradually moving into data-centric businesses such as AI and autonomous driving. Intel is a dominant player for microprocessors in both consumer and enterprise markets. Data Center Group, Internet of Things Group, Mobileye, Non-Volatile memory solutions group and Programmable solutions Group and All Other business units form the crux of Intel's data-centric business model. DCG segment deals with servers, workstations and other products for cloud, enterprise, and communication infrastructure market. IOTG offers high-performance compute solutions and embedded applications. PSG segment offers programmable semiconductors, primarily FPGAs and structured ASICs. Mobileye is engaged in developing computer vision and machine learning-based sensing, data analysis, localization, mapping, and driving policy technology for ADAS and autonomous driving.

Summary

While this type of strategy requires a lot of capital, it is a great way to generate an income from stocks you want to own.

If you end up being assigned, you can sit back and collect the nice 5.53% dividend on offer from INTC.

You can do this on other stocks as well, but remember to start small until you understand a bit more about how this all works.

Mitigating Risk

With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.

Some traders like to add a deep out-of-the-money long put to reduce risk. For example, a January put option with a strike price of 17.50 could be purchased for around $50. Buying this put, would cap losses below 17.50 and reduce total capital at risk from $2,400 to $650.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

*Disclaimer: On the date of publication, Gavin McMaster did have (either directly or indirectly) positions in some of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, October 3, 2022.

More Stock Market News from Barchart

• Pre-Market Brief: Stocks Climb on Hopes of Fed Pivot
• Stocks Surge on Lower T-note Yields and a Rally in Energy Stocks
• Chesapeake Energy's 9.5% Dividend Yield Attracts Value Buyers
• PayPal Rebounds on Activist Intervention