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Intel (NYSE: INTC) has lagged the overall market so far in 2015, with the stock losing 11.19% while the S&P 500 has been break-even. I look for that to change in the next three or four months.
There are several reasons behind this rationale. If we look at the weekly chart for Intel over the last 3 1/2 years, we see an upward sloped trendline that is prominent over the last two-plus years. The trendline connects the lows, and now it is sitting right around the $29 level.
There is another layer of support created by the lows from October and this past week. These lows were at $29.25 and $29.31, respectively. While this creates a second layer of support beyond the trendline, it also could be a sign that the stock is forming a double bottom pattern.
If this is the case, Intel could vault higher over the next six to 12 months. The stock formed a similar pattern with lows in December 2013 and February 2014 before it jumped 50% in six months.
In addition to the trendline and the double bottom pattern, the stock is the most oversold it has been since August 2013 based on the slow stochastic readings. The slow stochastic readings just did a bullish crossover last week, and when the stock did this in 2013 it gained 65% in the next year.
The sentiment toward Intel has been moving toward the bearish camp in the past few months. That is a good thing from a contrarian’s point of view.
The short interest ratio is 4.5, and the short interest has been increasing rather dramatically since the beginning of February. Analysts are also skeptical of Intel, as the majority of the 47 analysts following the stock have it rated as a “hold” or a “sell.”
While a 50% gain over seven months and 64% over 12 months seem pretty respectable, I think the better play with Intel is to buy a LEAP call option.
If we look at the January 2017 LEAP at the 25 strike, the asking price is $8.90, or $890 per contract. To buy 100 shares of the stock you would need $3,200. If the stock performs like it did the last time it formed a double bottom, the stock would jump from $32 to $48. If that happens, the January 2017 25 strike call would have an intrinsic value of $23, or $2,300 per contract. Instead of gaining 50%, you would gain over 150%.
Now, if the stock drops below the $29 level in the next few months, the call option will decline in value and would likely drop to under $7, based on calculations from intrinsic values as well as time decay. So if the option drops from $8.90 to $6.90, you are looking at a loss of 22.4% and a dollar loss of $200 per contract. If you purchased 1oo shares of the stock at $32 and the stock drops to $29, you would lose $300. From a percentage standpoint, that is less than 10%, but it would be a greater dollar loss than the call option scenario.
So what you have in this example with the January 2017 25 strike call is the potential for a percentage gain of 150% and a dollar gain of $1,410. Buying 100 shares of the stock and seeing a 50% gain would generate a dollar gain of $1,600.
The bottom line with the Intel call options is that you are looking at a much greater percentage gain with a slightly smaller dollar gain than what you have with the stock.
On the risk side, you are looking at a potential loss that is greater in terms of percentages but smaller in terms of dollars.
That is a trade-off I am willing to take. I like the January 2017 25 strike calls on Intel, and I would look to hold them for six to nine months. I would look to sell them if the stock drops below the $29 level to minimize the loss.
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