Speculation on Intel Earnings Keeps Options Hot

Put buyers come out as Intel gets hammered.
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Compaq's (CPQ) profit warning Friday briefly rang the Street's bell, but the main course promises to be Intel's (INTC) - Get Report earnings report, due after the close on Tuesday.

Intel options are standard fare during earnings season, with plenty of institutional desks setting up straddles ahead of the numbers. A straddle is the purchase or sale of an equal number of puts and calls having the same terms. Investors use this strategy when they expect a drastic move in the stock but are unsure of the direction.

More often, investors take a shorter shot on options, expecting the usual price swings because of earnings due the following day. Adding to the swirl of events were the latest stock split, which took effect Monday, and a downgrade by

BancBoston Robertson Stephens

that spanked Intel stock, leaving it off 6% at 61 7/16.

Monday's trading session was no exception: Roughly 1,350 April 55 Intel calls, priced at $7 (or $700 per contract), crossed at 10:35 a.m., compared with open interest of 4,210 contracts. That deal was followed five minutes later by the same amount of April 55 puts.

Some traders look to be expecting not-so-great news from the chip giant. The out-of-the-money April 60 puts traded more than 11,000 contracts by midday. Buoyed by the falling stock price, the option's premium jumped 1 1/4 ($125) to 1 15/16 ($193.75).

Is the day before the right way to play Intel options? According to institutional investors, the lesson to draw from Intel is as simple as "get ready ahead of time."

Leon Gross, options strategist with

Salomon Smith Barney

, always tells institutional clients "to buy straddles well in advance of earnings, whereas retail investors will often come in the day before and end up buying an expensive put or call."

Often, he explains, as earnings near, investors end up paying out the nose for the volatility portion of an option. But "this is not a simple directional play" on the undulation in the stock price, he warns.

Technicians have a somewhat different take on Intel and would sooner place a directional bet than tinker with the short-term earnings potential.

Tammy DeRoshier, vice president with

Dorsey Wright

in Richmond, Va., makes this case that Intel's recent pullback is mostly technical. Demand for the stock is still much greater than supply, unlike Compaq, she argues, which has been showing for many months that "supply was in control, I wouldn't have touched it," she says.

On Intel, DeRoshier's firm generally recommends call options that are "in the money and several months out. First, you have to start off with a stock you expect to rise, then make the option look as much as the stock as possible."

With Intel, "the stock's chart is very positive, so even if earnings aren't what people expected, the technical support level is about in the mid-50s, and resistance is about 71," she says. "That's a good risk/reward ratio."

In other words, only $5 or so of downside and about $10 of upside potential.

How far out? If you are speculating on a stock you believe will go up, three- to six-month call options "give the stock time for the trade to work out." That works out to July 55 calls or October calls, which were trading on Monday at 10 1/8 and 12, respectively. (DeRoshier's firm doesn't hold positions in the option or the stock.)

In this case, investors may pay higher premiums for the longer-dated options, but they won't be subject to the extreme spikes in earnings seen on the cusp of earnings.