Buying Puts on Intel

A number of investors seemed to think that Intel had peaked in share price because they were buying puts on Intel. Buying a put gives the buyer the option but not the obligation to sell the underlying equity, such as shares of Intel, any time up until the expiration of the options contract. If, as investors seemed to think, Intel were to have gone down in price, exercising the put option would have allowed the buyer to sell the stock at the strike or contract price and then buy it back at the new, lower, market or spot price. Buying puts can be a long options strategy or a short options trading strategy. That is, the investor does not need to own the stock in order to be buying puts on Intel.

There are always buyers of calls and buyers of puts in the options markets. In fact there were more calls being purchased on Intel than puts prior to its quarterly announcement. Traders and investors buy and sell according to their own analysis. The difference between put buyers and call buyers had to do with expectations of how badly the Eurozone’s economic problems will affect PC sales and if the expected rebound in hardware upgrades will be soon enough and sufficient enough to substantially boost earnings. Then Intel came in with a positive earnings report and the stock went up in price. In this environment what is an option worth on Intel?

If Intel had given a poor report, put options would have been in the money and traders could have sold at the old strike price, bought at the new spot price and pocketed their profits. However, now the same Intel put options are out of the money. Their only value is their “time value” which is the value the market gives the option because, conceivably, anything could happen from now until the option expires. The advantage that the investor who was buying puts on Intel has is that he or she is only out the price of the premium and, in the long position, still has a now more valuable stock. For the short options trader he or she is out the premium but, if Intel goes up substantially, would be be better off than if they had sold short. Again, this is because of the limiting effect of the premium as the greatest amount of loss possible in buying options. Using the premium as a type of insurance is part of risk management in options trading.

To a degree Intel is a bellwether stock as steel and autos used to be years ago. As ubiquitous as computers are and as wired as companies are the purchase of computer hardware is an indicator of where the economy is going next. Likewise investors buying puts on Intel or buying calls is an indication of how investors read the situation. Intel having reported positive earnings and beating estimates may well send more traders to buying calls across the board and ignoring puts. What is an options trading strategy for Intel now that it has shown stronger than expected earnings? It depends upon how investors read the ongoing problems in Europe. To the extent that investors still worry about a downturn in sales or a slowing of the economic recovery hedging their bets by buying puts on Intel may still be in order.

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