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Intel Stock Short Strangle Could Generate $135 In Option Premium, But Losses Could Be Huge| Investor’s Business Daily

Intel (INTC) stock is showing an implied volatility percentile of 82%, which means the current level of IV is higher than 82% of all other occurrences in the last 12 months.


When volatility is high, it can be a good time to be an option seller rather than a buyer.

Part of the reason for the high volatility in Intel stock is because the company reports earnings on Thursday after the market close.

Option traders can take advantage of the high volatility by selling a strangle. This option trading strategy involves selling an out-of-the-money put and an out-of-the-money call with the same expiration date.

Bet Both Ways But Still Take Risk

This trade generates a premium for the option seller, but it does come with risks. A short strangle is an unprotected trade, sometimes referred to as a “naked” trade. Naked options can be risky because they expose the trader to potentially unlimited losses if the stock makes a big move.

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However, if the trader is right and the stock trades sideways, solid gains are also possible.

Assuming a trader believes that Intel stock will trade sideways over the next few weeks, they could look to sell an Aug. 18, 32 put and an Aug. 18, 37 call.

Tuesday, the 32 put could be sold for around $0.75 and the 37 call could be sold for around $0.60.

Selling those two options would generate a total of $135 in premium. That is the maximum possible gain on the trade if Intel stock closes between 32 and 37 on the day of expiration.

To work out the break-even prices, subtract the premium received from the put strike price and add it the premium to the call strike price.

That gives us break-even prices of 30.65 and 38.35.

Rising Implied Volatility Would Hurt Trade

This trade is a short vega trade, which means if implied volatility increases early in the trade, losses could occur.

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With a trade like this, the potential losses are unlimited and a lot higher than the potential gains. So traders would want to be very confident that the stock is going to remain flat over the course of the trade.

A stop loss could be placed at the break-even points.

According to the IBD Stock Checkup, Intel stock is ranked No. 19 in its industry group and has a Composite Rating of 21, an EPS Rating of 26 and a Relative Strength Rating of 19.

Check out IBD’s new OptionsTrader app for options education, trade ideas and more! Download from the Apple App Store today.

Please 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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