Intel Corp Has Unusual Long-Term Call Options Activity - Investors Bullish on Intel Stock?

A Barchart report shows that institutional investors have piled into long-dated Intel Corp (INTC) call options. That is after its huge rise on Friday. Are investors still bullish on INTC? Or are they just taking advantage of high long-term INTC call premiums?

INTC closed at $84.52 on Tuesday, April 28, but this is up significantly from last week. INTC shot up 23.6% on Friday, April 24, to $82.54 from $66.58 on April 23. This was after Intel released its Q1 earnings results the night before.

So far this week, INTC has stayed aloft. This could have tempted institutional investors to take advantage of this huge move, as seen in the Barchart report. More on this below.

What's Going On With INTC Stock?

I discussed these developments, including Intel's earnings and free cash flow prospects, in an April 26 Barchart article, “Intel Could Still Be Undervalued Based on Strong Free Cash Flow.”

Suffice it to say that Intel stock could be worth $100 per share, based on free cash flow projections and analysts' revenue forecasts. This still implies that investors can learn more about my reasoning by reading that Barchart article.

Other analysts are nowhere near that high with their price targets (PT). For example, Yahoo! Finance reports the average PT is $75.42, Barchart's survey is $74.54, and AnaChart's survey is $62.85. 

Wall Street analysts can sometimes be slower to react to fundamental developments compared to hedge funds and money managers.

That's why I find it interesting that institutional investors have piled into INTC call options at the $110 strike price. 

Unusual Stock Options Activity in Long-Dated INTC Calls

This can be seen in the Barchart Unusual Stock Options Activity Report. The report shows that almost 40x the prior number of INTC calls expiring Aug. 21 have traded.

Why It Makes Sense for Buyers. That's even 10% higher than my price target. My $100.70 PT implies a 19% upside over the next year. But this $110 strike price call expires in just 115 days (almost 4 months) on August 21.

That implies some institutional managers believe INTC can soar over 37.5% in the next 4 months. Or they are taking advantage of the high premiums available. Let's look at this.

The premium for the Aug. 21 call option is $6.23. That means call option buyers have to see INTC rise to $116.23 before there is any intrinsic value:

   $110 + $6.23 = $116.23

   $116.23 / $84.52 = 1.375, i.e., +37.5% to breakeven

However, note that it is not the only play here. Some institutional investors are buying these calls on a “better fool" theory basis. They may expect INTC to rise over the next 4 months.

That will potentially push the Aug. 21 $110 INTC call premiums higher. That way, the buyer can offload their call options to a greater fool than themselves.

Sellers. Some institutional investors who already own INTC stock are happy to sell their shares at the $110 strike price in 4 months. They are willing to receive $6.23 per share for that obligation, if INTC rises to $110.00, so the yield is:

  $6.23 / $84.52 = 0.07371 = 7.371% over 115 days

 Annualized Yield = 365 days / 115 = 3.174 x 7.371% = 23.39%

This is an attractive return for institutional investors. If they can repeat this play 3.17 times a year, the expected return is over 23%.

Moreover, even if INTC rises to $110, and the account is obligated to sell at that price, the total return will be:

  $110/$84.52 = 1.3015, i.e., 30.15% capital gain +

  7.371% income yield = 37.52% total potential return

Summary of Both Sides of this Call Option Play

So this trade makes sense for INTC holders to sell covered calls and wait to see if it rises to that point. And buyers can either be expecting to see INTC rise over $116, or they are playing a speculative game in INTC stock.

The bottom line here is that both buyers and sellers have good reasons to trade these out-of-the-money call options. The underlying theme, however, seems to be a general bullish outlook in Intel stock.