Intel Corp. (
) is expected to report a profit of 50 cents per share after the
close of trading tomorrow. In the same quarter last year, the
company posted a profit of 33 cents per share. Historically, Intel
has bested the consensus estimate in each of the prior four
reporting periods, with an average upside surprise of roughly
As you might expect, options activity is starting to pick up on
this semiconductor specialist, especially on the call front. Some
113,000 of these bullishly oriented contracts have changed hands on
INTC today. Overall, the out-of-the-money October 20 call has
attracted the most attention, with about 23,000 contracts crossing
the tape. The most popular put, meanwhile, is the October 19
strike, where some 12,000 puts have traded so far.
While most of INTC's options activity is taking place in the
front-month October series, a more interesting trade on the
semiconductor giant took place in the back-month November series.
Specifically, a block of 5,000 INTC November 21 calls traded at
11:27 a.m. Eastern time on the Philadelphia Stock Exchange (PHLX)
for the bid price of $0.19. The second half of this spread took
place on INTC's November 20 call, where 5,000 contracts traded at
the same time on the same exchange for the ask price of $0.51.
Given this data, it would appear that we are looking at a vertical
call spread, more commonly known as a
, on Intel Corp. This options strategy is also known as a long call
spread, or a bull call spread.
The Anatomy of an Intel Corp. Vertical Call
Breaking down this potential debit spread position, the trader
purchased 5,000 November 20 calls for the ask price of $0.51,
resulting in a debit of $255,000 -- (0.51 * 100) * 5,000 =
$255,000. In the absence of the premium received by selling the
November 21 call, the trader would need INTC to rally roughly 5%,
from Friday's close at $19.52, to $20.51 per share, in order for
the position to reach breakeven at expiration. Furthermore, the
maximum loss on this leg of the position is limited to the initial
investment of $255,000.
As you can see, the second leg of the debit spread helps to
offset the cost of the overall position. In this case, the trader
sold 5,000 November 21 calls for the bid price of $0.19, netting a
total credit of $95,000 -- (0.19 * 100) * 5,000 = $95,000.
Combining this leg of the trade with the purchased November 20 call
lowers the total cost of the entire position to $160,000 --
$255,000 - $95,000 = $160,000.
The addition of the sold November 21 call also lowers breakeven
on the trade. To arrive at breakeven, we subtract the credit
received from the sold November 21 call from the debit incurred by
purchasing the November 20 call. We arrive at a cost of $0.32, or
$32 per pair of contracts. As a result, the trader now needs INTC
to rally roughly 4%, to $20.32, in order to recoup the initial
investment on the entire position.
The maximum profit is calculated by subtracting the net premium
paid from the difference between the two strikes, and is reached if
INTC rallies to $21 per share at expiration. In this case, the
maximum profit is $0.68 -- (21 - 20) - 0.32 = $0.68 -- or $68 per
pair of contracts. The maximum loss is equal to the net debit of
$0.32, or $32 per pair of contracts. Below is a chart for a rough
visual representation of the trade's profit/loss scenario:
After the vertical call spread has been entered, increasing
implied volatility is pretty much neutral to the overall position,
as it lifts the value of both the sold option and the purchased
option. At the time of the trade, implieds for the November 20 call
were 27.42%, while the implied volatility for the November 21 call
rested at 26.02%. For comparison, INTC's one-month historical
volatility was perched at 20.18%.
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