The market remains choppy with a downward bias and one stock that looks like it has further downside is Intel.
XAn Option Play For A Bearish Outlook
Intel (INTC) is stuck below its 21-, 50- and 200-day moving averages. All of them are trending lower and it's finding resistance at the 21- and 50-day lines.
The Composite Rating for Intel stock is 75, on a 1-99 scale with 99 tops. However, the Relative Strength Rating is a lowly 24 making it a good potential candidate for a bearish option trade.
The bear call spread is an easy trade for option beginners.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call with the same expiration.
The strategy can be profitable if the stock trades lower, sideways and even if it trades slightly higher. Ideally, the stock stays below the short call at expiry.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. That is, you always know the worst-case scenario in advance. Here's a potential setup for Intel stock.
Bear Call Spread On Intel Stock
On INTC stock, a bear call spread with an Oct. 16 expiration could use the 50 strike as the short call and the 52.50 strike as the long call. INTC stock is due to report earnings on Oct. 22. Since that is after the expiration, it eliminates the earnings risk with this trade.
I would look to sell that spread for 65 cents per share or higher depending on where the market trades today.
The maximum profit on the trade would be $65 per contract with a maximum risk of $185. If Intel stock closes below 50 on Oct. 16, the spread would achieve maximum profit by expiring worthless. You keep the $65 option premium for each block of 100 shares.
Setting A Stop Loss
You can calculate the maximum loss by taking the difference of the spreads minus the premium collected ($2.50 — 65 cents). If INTC stock closes above 52.50 on Oct. 16, the premium seller loses $185 on the trade per contract. No matter how far down Intel goes, the loss on this trade won't get bigger than that.
For a trade like this, I would set a stop loss if the spread doubled in value to $1.30. Remember, when the spread trades at a higher price than your credit of 65 cents, you are losing money.
Also remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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The Link LonkSeptember 25, 2020 at 12:20AM
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Intel Stock Offers Option Profits On Weak Action - Investor's Business Daily
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