If you lack investment discipline and don’t have a plan to handle your winners and losers, you are likely fated to lose more than you should—and to earn less than you could.
Intel is up about 115% in April. A gain of that size is rare, and a gain of that size in a month is even rarer. The iShares Semiconductor exchange-traded fund, by contrast, is up about 37% over the same period.
The challenge is how to handle such extraordinary returns without losing control of the stock when the investment thesis remains valid.
In the era of artificial intelligence, chip stocks are critical to powering supercharged intelligence. Only a few companies, Intel among them, can make the most advanced AI chips.
Still, Intel’s advance has been so strong in such a short time that market realities could assert themselves even if the stock thesis is valid. OpenAI, for instance, has created pressure across the AI ecosystem on news the private company is growing more slowly than anticipated. When bullish momentum ebbs, stocks can plunge quickly.
Intel’s May call options are priced with an implied volatility that exceeds 75%, which suggests a daily move of about 4.68%, up or down. The SPDR S&P 500 ETF’s May implied volatility, at about 16%, is far more muted.
Intel’s stock chart is strong. Its five-day simple moving average is $82.72, the 20-day is $66.34, and the 50-day is $53.53. Yet one measure of momentum—Intel’s relative strength indicator —is extremely stretched at about 253, a level that suggests buyers could soon run out of steam as the stock is technically overbought.
The standard options recommendation for these situations—the stock-replacement strategy—is to sell the stock and buy a call option, which will allow you to lock in profits and participate in any future gains through the call, which costs far less money than the equivalent number of shares. The logic is elemental, though the reality is more complex.
If this is appealing, investors could buy the January $110 call, which cost about $19 when the stock was at $94.75.
If the stock is at $150 at expiration, the call is worth $40. Should the stock decline between now and then, the money spent on the call would be lost, but that wouldn’t be so bad because you sold the stock position at a high price.
The key drawback to the strategy is that selling the stock incurs a capital gain, and few investors like paying capital-gains taxes, even if it makes sense from a risk-management perspective.
Still, Intel’s rapid advance is a risk factor, and something should be done to secure the gain. An alternative strategy to consider: Sell a call and buy a put option, a bearish risk reversal.
Because Intel’s stock has been so red hot, its calls are priced with a greed premium. Anyone who buys them pays a pretty price. We want to flip that around and sell the call, essentially acting like a dealer who is satisfying demand from aggressive, unmoored investors who think Intel will keep rising.
The proceeds from selling the call can be used to offset the cost of buying a put.
The strategy is intended to commit investors to selling Intel at an even higher price, while also profiting from any potential decline. If the stock stalls and reverses course, the put will increase in value and the call’s value would decline.
At Intel’s $94.75 price, the May $110 call could be sold for about $2.60 and the May $84 put could be bought for about $2.55. If Intel is at $60 at expiration, the put is worth $24.
The risk: Intel builds upon its extraordinary gains and keeps rising, which would obligate investors to sell the stock, or to manage the short call to avoid assignment.
Comments