With semiconductor stocks losing momentum over the past few weeks, Intel’s strength is starting to show some cracks and at risk of a pullback. Here’s an options strategy to capitalize on the potential decline. After being in the lead of the semiconductor industry for nearly 2 decades, Intel’s design and fabrication model become their Achilles heel a few years ago. Ever since, Intel (INTC) has been playing catch-up, and early last year, investors started to pay attention and boost the shares. INTC 5Y mountain Intel, 5 years But perhaps the stock is starting to get ahead of itself on the back of an AI boom. This week’s news that China is potentially phasing out Intel and AMD chips from their government usage will likely add to downside. If you look at a chart of INTC over the past 18 months, the stock has doubled from below $24 to just over $50 at the end of last year. However, just after reaching those 52-week highs, INTC has underperformed the market considerably. The momentum turning negative, coupled with the poor relative strength, suggests INTC could be headed for some further downside towards its $37 breakout level. Looking at the business, Intel is now trading at the richest valuation we have seen over the past decade at over 31 times forward earnings. This is while analysts do not expect EPS and revenues to recover to 2021 levels until 2027. There are a lot of unknowns with how the industry will transform with AI over the next 12-24 months so I believe the current valuation is priced too high. Additionally, Intel’s historical valuation has ranged between 10 times to 15 times forward earnings over the past decade, and it’s now priced at double that. This leads to risks to the downside as relative strength and momentum slows for INTC. The trade With implied volatility near the upper bound of its 52-week range, my preference is to buy a put vertical spread to offset the cost of buying an outright put. I’m looking out to May and purchasing the $42/37 Put vertical at $1.81 debit. This entails: Buying May $42 Puts @ $2.55 Selling May $37 Puts @ $0.74 This would provide a potential profit of $319 per contract if INTC Is below $37, while risking $181 per contract if INTC Is above $42 at expiration. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
