Intel Traders Face Big Losses As Chipmaker's Stock Drops

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Intel Corp. (INTC) options traders were betting this morning that the stock would jump nearly 16% by the middle of May. An analysis of the technical trading patterns also suggested the stock would rise as well, supporting the bullish outlook of the options bets. 

But traders' bet on a quick profit in the next month could turn into huge losses if the stock fails to recover from today's huge declines. Today's drop accelerated when Bloomberg published a story saying Apple Inc. (AAPL) planned to use its own chips in Mac computers by 2020, replacing Intel chips, citing anonymous sources. Intel's stock was down more than 8% as of 2:17 pm in New York trading.

Before the news broke, Intel shares had risen by nearly 7.5% in 2018, easily outperforming the S&P 500. Shares of Intel jumped higher at the end of January after the company reported better-than-expected quarterly results. Earnings for the quarter topped estimates by nearly 25%, while revenue topped estimates by almost 4.5%. The big beat led to Intel shares breaking out and rising above $50 for the time since the year 2000. 

INTC Chart

INTC data by YCharts

Bullish Options Bets

Intel's options set to expire on May 18 were implying that shares of the chipmaker would rise or fall by 10.5% from the $52.5 strike price. That put the stock in a massive trading range of $47 to $58. But the number of open calls at that strike price was over 40,000 contracts, versus only 3,000 contracts of open puts. It suggested that a large number of traders were betting that shares of Intel would rise by 16.5% by options expiration.

The open calls for the $52.5 May options were steadily rising since late February, an indication that traders are growing optimistic about the company's results due at the end of April. 

(Trade Alert)

Techincal Support Options Bets

The technical chart also showed the stock was entrenched in a solid uptrend even during the latest stock market sell-off. 

Slow Growth

But the growth outlook for Intel isn't stellar, with analysts estimates looking for Intel's revenue to grow by only 3.5 to 4% for 2018, 2019 and 2020. Meanwhile, earnings are only expected to grow over by 3.5% in 2018, 5.7% in 2019, and 8.6% in 2020, steady growth. Those slow growth rates are likely why shares of Intel trade at only 13.4 times 2019 earnings estimates of $3.79.

And if Apple goes through with its plans in 2020 to use its own chips, that could squeeze Intel's earnings and stock price.

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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