Intel and NEP: Ways to Profit Even When Stocks Go Down

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Written by Nick Ackerman

Tensions in Russia over Ukraine and interest rates continue to dominate the headlines. This put pressure on the whole market and led to higher premiums when selling options due to increasing volatility. Of course, that’s the trade-off when the possibility of put assignments is even greater.

In our situation, we had Intel (INTC) and NextEra Energy Partners (NEP) put options that we had sold which expired on February 18th. They sat relatively comfortably without breaching our strike prices. This was before INTC had its investor meeting. These aren’t the only two stocks that have gone down in the market, but it’s how we can get some extra profit or “income” even when the stock is down.

Intel

When INTC has its earnings report or an investor update meeting, it seems inevitable – it sells.

We originally sold the put options on January 27, 2022. The day after their earnings, the stock fell about 6%. After the investors’ meeting, the stock also fell in the same way on February 18 (the day the option expired), which sent it down on the wire.

INTC share price 02/18/2022

INTC Price 02/18/2022 (Google Finance)

The stock itself closed above the $45 strike level. However, options can be exercised after the market closes, as shown in the main chat. He had also been flirting all day between the $45 strike. In all of my trading, I confess that I do not recall a position being sunk so close to the end, where after-hours trading could have been a determining factor.

Here is the Stanford chemist:

Auto-exercise, after-hours risk and other options expiration issues

Basically, the automatic assignment is at 4 p.m. BUT the holder of the long option can ask to exercise the option, even after hours (1.5 hours after the close according to the article). So, let’s say the INTC closes above $45 at 4pm, but falls below $45 after hours. The put option will not be automatically exercised UNLESS the holder of the long option MANUALLY notifies their broker to exercise it, in which case the holder of the short put option would be obligated to take the assignment.

Due to out-of-hours trading, an out-of-the-money position at market close may subsequently become in-the-money. In hindsight, it would have been better to close just off the finish for a few cents to get out of the trade. This would have taken away some of the uncertainty over the last hour and a half that the price might go down. From what I could see, INTC only fell below $45 very briefly at $44.98, but at 5:30 the action closed at $45 – just off currency. Talk about coming over!

On top of that, the stock didn’t even come close to the initial strike.

Intel stock price chart

Y-Charts

At the investor meeting, we really didn’t hear anything new. They gave indications for 2022 – that was above estimates, by the way! INTC forecasts revenue of $76 billion and non-GAAP EPS of $3.50.

Adjusted free cash flow is expected to be negative $1 billion or $2 billion due to massive spending. In my mind, they will exceed those expectations, as they usually do. Seeking Alpha reported consensus numbers for 2022; revenue at $75.48 million and consensus EPS at $2.92. Most other stocks would seem to jump on news like this.

Given that they have just increased their dividend by 5%, I am convinced that they intend to remain committed to the dividend. Admittedly, I wasn’t sure we would see an increase this year due to heavier spending expectations. I certainly wasn’t expecting a reduction, but a freeze on current levels seemed like something in the cards. Here’s what I had to say in my January INTC article:

Does this mean we will have a massive increase? Probably not. Could that mean no increase at all for this year? He most certainly could. However, what in my view is not on the table is the elimination or reduction of the dividend. They announced the increases in the second half of January over the past few years. So we won’t have to wait long to see what they do.

They also reiterated that they would be spending a lot and that margins would be squeezed – something we all already knew for those who follow this company.

They then expect revenue growth to accelerate in 2025-26 and margins to begin to rise again.

Intel Growth Estimates 2023-2024

Investor Meeting Projections (Intel)

The other key part of the announcement was the Granite Rapids, one of their server chips originally scheduled to launch in 2023 has been delayed. However, it wasn’t the “usual” lag we’ve seen previously. In this case, it’s delayed because it will be an even better or upgraded chip, as they mention – it’s not just delayed in the way that would put it further behind its rivals.

granite rapids – Reinforcing its confidence in the health of the Intel 3 process node, Intel announced that it will upgrade Granite Rapids from Intel 4 to Intel 3 process. This next generation P-core Xeon product is coming in 2024 and will strengthen the Intel’s industry leadership.

With all that said, the trade expired worthless. We collected a total of $0.81 or what would have been a potential annualized return of 29.86%. Where the stock is currently trading could increase the potential for additional put options as the stock continues to be punished for reversing. To be fair, it’s a bit of a wait-and-see as investors may not see any progress in stock price appreciation over the next 2-3 years. At the same time, if the company shows progress in meeting its lofty goals, the stock could soar.

This is the 6th transaction that we have carried out with INTC without the sale of shares. The previous 5 trades were closed before expiry to lock in profits at different levels. In total this means that we have now collected $2.98 premium on this single share per share or $298 per contract. This initial transaction was concluded on July 15, 2021; it was one of the first business ideas shared by Cash Builder Opportunities after its launch.

That was for 218 days compared to the $1.06 in dividends it had declared during the same period. We basically have 2.81x the dividend collecting the option premium. Some like to call the call option premium “income” – though that’s not technically correct – the money itself can be spent just like any dividend money. I’m already long on INTC stock so I received some of those dividends, but it can show the power of writing options and especially writing puts when you have cash in hand.

NextEra Energy Partners

NextEra Energy Partners (NEP) didn’t have quite the same drama as our exchange with INTC. However, NEP has been under pressure with the broader markets selling off lately. Shares are down nearly 18.5% from the 52-week high at the time of this writing.

NextEra Energy Partners stock

Y-Charts

NEP is another position I’ve been on for a long time and wouldn’t mind laying down. I recently highlighted NEP alongside American Tower Corp. (AMT) as two stocks with growing payouts to beat inflation. I continue to expect that to be the case, given their growth expectations and management feedback. Between 2021 and 2024, they expect an average annual growth of 12-15% in their unit distributions.

As highlighted in this previous article, they have been a consistent raiser, increasing their payout quarterly for years now. It’s the kind of consistency that I don’t mind. In this case, the sale of some put options also crowded out some additional “income”.

NEP dividend

Y-Charts

For this trade, we sold the put options on January 18, 2022. That was 31 days before the 18th expired, and we collected $2.03 per share or $203 per contract. This is certainly a considerable amount that translated into a potential annualized return of 34.14% if we could repeat a similar trade throughout the year. The higher premium would be attributed to the overall volatility and declines experienced by the units.

The other factor is that there wasn’t too much cushion for the downsides when the trade was entered. Selling closer to the silver will yield a higher premium due to the increased chance of surrender. At the time, it would only have taken a drop of about 4.5%. Unlike our INTC trade, it never broke above the $70 strike price, but it had a good run at that level twice during the trade.

NEP share price

Y-Charts

When we first entered the trade, the premium collected over the 31 days was 3x the quarterly distribution of $0.685, noting that we made it over just 31 days instead of the ~90 for the payout quarterly. Since then, NEP has increased its distribution as expected to $0.7075 – which would still give us an attractive match.

And after

With the final pass of another options expiration, we are locking in more profits to increase our income. The global market has created volatility, but with volatility comes opportunity. INTC and NEP remain attractive candidates to write more puts going forward, given that their current levels are discounted favorably from their previous highs. INTC itself is just a generally cheap tech stock – with something to prove – but still reasonably valued.

Selling put options is a way to generate returns from these positions, even if they are down. For shareholders already holding shares, they might also consider writing covered call options. This would have been the way we proceeded in the future if we had taken the assignment of either position, using the “wheel option strategy”. In my current situation, I want to have long exposure to INTC and NEP. So unless I am assigned a different “sleeve” of stocks, I am content to hold my long positions.

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