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Intel Corporation (INTC) may have bottomed out. Investors in long-dated call options today may have concluded this, resulting in unusual options volume. They may believe that INTC is worth substantially more.
INTC is at $22.39 in midday trading on Wednesday, Oct. 16. It has dropped significantly in the last several months. INTC peaked at $34.92 in mid-July but recently hit a low of $18.77 on Aug. 7.
Today a large number of call options in INTC with out-of-the-money strike prices and expiration periods of over 4 months. That implies that some institutional investors may be getting positive on INTC stock. Let's look at why that might be.
Intel's Outlook
No wonder this happened, as the company had terrible Q2 results and even eliminated its dividend. Investors don't like that. Moreover, the company had negative free cash flow (FCF). However, Intel reported that on an adjusted basis, after incentives it received from outside sources including the U.S. government, its adj. FCF was positive.
The good news is that Intel now projects it will reach positive free cash flow next year. The CFO, Dave Zinsner said in prepared remarks:
“In 2025, with OpEx of approximately $17.5 billion and net CapEx of $12 billion to $14 billion, we expect to achieve positive adjusted free cash flow.”
Analysts project sales will reach $56.69 billion in 2025. That implies that its FCF margin could be over 6.1% (i.e., $3.5 billion adj. FCF/$56.69b sales). As a result, if this occurs, analysts could project higher FCF margins going forward.
Moreover, using a 3.0% FCF yield metric, its market cap could be minimally worth $116.67 billion. That is 22% over its $95.6 billion market value today. So, INTC could be worth 22% more or $27.31 per share. Keep in mind, though, this assumes that 2025 results in at least a $3.5 billion adj. FCF figure as management projects.
Another way to look at this is that if sales rise to $58 billion over the next 2 years, and its margins rise to over 6.1%, say 10%, it could end up with $5.8 billion in adj. FCF. Using a more conservative 5% FCF yield metric results in a market cap of $116 billion - again resulting in a 22% higher stock price.
That could be one reason why investors have been piling into longer-dated INTC call options today.
Unusual Call Options Activity
This unusually large volume of call options activity can be seen in today's Barchart Unusual Stock Options Activity Report.
It shows that over 7,600 calls at the $25.00 strike price have traded for expiration on Feb. 21, 2025, which is 128 days from now, or over 4 months in the future. The midprice is $2.05 and the ask price is $2.07. So, theoretically, the investor's breakeven price is $27.07, or over 20% higher than today's price.
Note that this is close to the $27.31 target price that I set above using management's expectations of a positive adj. FCF next year.
Similarly, over 7,700 call option contracts have traded at the $30 strike price for the same expiration price. Note that these calls are cheaper - costing just 92 cents on the ask price.
Some of these investors may have sold the higher strike price calls to help pay for the $25.00 strike price calls. That limits their potential profits (since they will have to sell at $30.00 but their breakeven is lower at just $26.15 (i.e., $2.07-0.92 +$25.00 call option strike price). In other words, they hope that the stock will hit the $27+ target price in the next 4 months. Since their cost is just $26.15, they could make a profit if that happens.
Note that the higher strike price has a lower delta than the lower strike price. That implies that the higher strike price may be somewhat less risky. But don't be deceived about this. Both of these trades are out-of-the-money (OTM). That means they have no intrinsic value right now and are essentially speculative trades.
The bottom line is that investors see a good upside in INTC stock here. INTC may have bottomed. Maybe playing OTM calls in longer-dated calls is one to play this.
However, a good deal will depend on the company's upcoming Q3 results, due out on Oct. 31. Given the volatility that could result from those earnings, most investors may want to take a back seat.
It might be better to see how management feels about the future and the company's ability to generate free cash flow before copying these risky options trades.
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. For more information please view the Barchart Disclosure Policy here.
