Bloomberg News

Intel Puts Highest Since 2005 in Hedge Before Earnings: Options

October 17, 2011

Oct. 17 (Bloomberg) -- Intel Corp. options traders are boosting the price of bearish contracts to the highest level in six years, protecting against losses even if the world’s biggest semiconductor maker beats analysts’ earnings estimates for a ninth straight quarter tomorrow.

Puts to sell the Santa Clara, California-based company are 1.28 times more expensive than calls to buy, according to data compiled by Bloomberg. That’s the widest difference in the price relationship known as skew since May 2005, the data show.

Concern is rising in options markets after Intel’s shares gained 12 percent this year, the second-biggest increase among 18 chipmakers in the Standard & Poor’s 500 Index behind KLA- Tencor Corp. The world’s biggest semiconductor company lowered its forecast for growth in personal-computer shipments this year after reporting second-quarter results on July 20.

“In this volatile market, if Intel does disappoint what have become perhaps overly optimistic expectations for earnings, the stock could see significant downside,” Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York, said in a telephone interview on Oct. 14. “We’ve seen the put activity increase significantly.”

Intel’s profit may rise 25 percent to 65 cents a share excluding some items, up from 61 cents four weeks ago, according to the average analyst projection in a Bloomberg survey. The company reported its fifth consecutive quarter of record revenue in July and has beaten analyst earnings estimates eight straight times, according to Bloomberg data.

Outstanding Puts

Seven of the 10 Intel options with the biggest increase in ownership in the past week were puts, according to data compiled by Bloomberg. December puts with an exercise price of $18 had the biggest gain in open interest, adding 32,649 contracts to 35,817. October $23 contracts followed, with 56,128 options.

“The real risk is protecting that downside,” Ophir Gottlieb, managing director of client services at San Francisco- based Livevol Inc., a provider of options-market analytics, said in an Oct. 14 telephone interview. “People have realized a fairly large gain in Intel, and now they’re just buying the downside protection into earnings.”

The market for PC shipments will grow 8 percent to 10 percent in 2011, down from an earlier forecast in the “low double digits,” Intel Chief Executive Officer Paul Otellini said July 20. The company predicted the shortfall would be mainly in lower-end machines powered by Intel’s discount Atom line of microprocessors, according to Otellini.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, tumbled 38 percent over the nine days through Oct. 14 for the longest retreat since February 2010. The gauge, which has averaged 20.48 in its 21-year history, fell as the S&P 500 jumped 8.2 percent in the past two weeks, the biggest gain since July 2009. The volatility measure rose 18 percent, the most since Aug. 18, to 33.39 today.

Volatility Decreasing

The volatility gauge fell the most in 19 years in the six trading sessions before New York-based Alcoa Inc. posted results on Oct. 4, a record drop before the start of earnings season, according to data since January 1993 compiled by Bloomberg.

Intel trades for 10.59 times profit in the last 12 months, 8 percent less than the average valuation for chip stocks in the S&P 500. Among analysts who track the shares, 34 rate it “buy,” 16 “hold” and five “sell,” according to data compiled by Bloomberg.

Gross margin, the percentage of sales left after deducting production costs, will be about 64 percent in the third quarter, Intel said in July, up from 60.6 percent in the second quarter. The company had $11.55 billion in cash and short-term investments in the three months ended July 2, higher than 401 nonfinancial companies in the S&P 500.

‘Tough Climate’

“Intel has done a great job of running their business in a very tough climate,” Wayne Wilbanks, chief investment officer at Wilbanks, Smith & Thomas in Norfolk, Virginia, said in an e- mail yesterday. His firm manages about $1.8 billion. “Margins are near all-time highs and the company is sitting on tons of cash.”

Options are implying Intel’s shares will rise or fall 4 percent after it reports results, compared with an average gain of 0.9 percent in the past eight quarters, data compiled by Bloomberg show. Intel’s implied volatility, the key gauge of options prices, for contracts expiring in three months dropped 24 percent from its Oct. 3 high as the stock rallied. It closed at 30.24 on Oct. 14.

“People might be taking the chance of locking some gains and paying for some protection,” Stephen Solaka, who oversees about $50 million including options as co-founder of Belmont Capital Group in Los Angeles, said in a telephone interview Oct. 14. “It’s probably a mix of both: people protecting gains given the recent rally, and additionally, earnings,” he said.

--With assistance from Ian King in San Francisco, Gaurav Panchal in London and Jeff Kearns in New York. Editors: Joanna Ossinger, Chris Nagi

To contact the reporters on this story: Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Andrew Rummer at arummer@bloomberg.net


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