Huge, Unusual Intel Put Options Volume

Today, large, unusual put option volume in Intel Corp. (INTC) stock signals a bullish outlook. The puts are at-the-money strike prices with a 4% yield to short sellers. This signals institutional investors are willing to buy INTC.

INTC is up 9% today at $57.87 after Intel posted on X yesterday that it is set to collaborate with Tesla (TSLA) and SpaceX, both Elon Musk companies, to make chips for Musk’s new Terafab project (so far, no press release).

That development could significantly increase Intel’s cash flow. I described the company’s strong free cash flow (FCF) prospects in a Barchart article last week, “Intel Has Unusual Put Option Volume – Signals Upside in INTC Stock.”

I showed that, based on management’s guidance and analysts’ revenue projections, Intel could generate $8.4 billion in adjusted free cash flow over the next 12 months (NTM).

Using a 2.50% FCF yield metric, that would lift its market value to $336 billion (i.e., 8.4b/0.035 = $336b). That is 15% higher than INTC’s market cap today of $291.9 billion, according to Yahoo! Finance.

In other words, INTC stock could be worth $66.55 per share (i.e., 1.15 x $57.87, today’s price).

Moreover, analysts are now likely to raise their revenue forecasts for Intel over the next several months. That could significantly increase its adj. FCF forecasts and, as a result, INTC stock’s underlying value.

So, no wonder there is huge options activity in INTC stock.

The puts trading today in huge volume are at the $57.00 strike price for expiry on April 17, 9 days from now. This volume is almost 28 times the prior number of puts outstanding at $57.00, likely from institutional investors.

This can be seen in today’s Barchart Unusual Stock Options Activity Report (see table below).

The premium the short-put investors who likely initiated this trade is $2.32. That means the short-put investors collect an immediate 4% yield:

$2.32 / $57.00 = 0.0407  = 4.07%

It means that these investors, who have to secure cash collateral of $5,700 for every put with a “Sell to Open” order, immediately make $232.

As a result, even if INTC falls below $57.00 on or before April 17, these investors have a lower buy-in breakeven point:

$57.00 – $2.32 = $54.68

That is 5% lower than today’s price. In other words, these investors are happy to buy into INTC stock at a price 5% lower. They see the potential upside in INTC stock, as I showed above.

Now, buyers of these puts also think INTC will fall much further below this breakeven point. After all, INTC has shot up a great deal recently.

This could result in potential unrealized losses for cash-secured short-put investors, especially if INTC stays well below $54.68 for an extended period.

But, at least these investors have potential upside. They can also repeat this trade (i.e., a 4% yield every 9 days works out to a 40% total return over 3 months).

In addition, after being assigned to buy INTC stock, these investors could sell covered calls to mitigate any unrealized losses.

The bottom line is that INTC stock looks cheap here. Shorting at-the-money and out-of-the-money puts in INTC for near-term periods is a potential way to play Intel’s upside.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com