Option Strategy

In this blog post I will be giving advice on how to go about investing in options, specifically for Intel. The call options I will be focusing on are the ones with the strike prices of 45, 50, 55, and 60. Basically with a call option your investment is only liable for the amount you spent to get it. For example, if you buy a call option, your investment price is that much regardless of if the stock goes up or down, so you won't lose more than that initial investment. However, if the stock price crosses the strike price the security can now be bought by the holder of the option and begin to make money. This is depicted in the graph below.

The blue line represents if the strike price was 45 and the green is if the strike price was 60. You don't begin to see any payoff from your call option until it reaches that strike price, but after it reaches that point the sky is the limit.

Since Intel was such a different company in the 90's compared to what it is now I will use stock price data from March 1, 2009 after the stock market crash of '08 to November 2, 2021. This stock price data had an annual volatility of 0.291. Using this volatility and the Black-Scholes model, I will calculate the theoretical prices of the call options presented earlier with strike prices of, 45, 50, 55, and 60 for January 20, 2023. The Black-Scholes model for call options with dividends looks like this: C = S0e −qtN(d1) − Xe−RtN(d2). This equation takes into account the stock price (SO), strike price (X), volatility, time to maturity (t), interest rate (R), dividends (q) and a couple of other calculations using these figures. When plugging in the strike prices of 45, 50, 55, and 60, the call option prices came out to be very similar to what can be found on Yahoo Finance. The most any one figure is off is only by a couple of decimal points. The minor differences could be due to the volatility number we configured earlier.

To try and realize this difference I will calculate the implied volatility of each option using the option prices. The implied volatility for each call option is presented below.

X=45; Implied Volatility=0.286

X=50; Implied Volatility=0.280

X=55; Implied Volatility=0.283

X=60; Implied Volatility=0.278

These figures come out with an average implied volatility of 0.282, compared to our historical volatility of 0.291. Our implied volatility, based on the call prices versus the historical volatility, based on the stock prices are not too far off. The difference is that in our historical volatility calculation we took the annual volatility of the returns from Intel through the period, March 2, 2009 to November 2, 2021. Whereas in our implied volatility calculation we took the actual call prices and calculated our sigma based on that data.

A few ways to help you determine if it is a good idea to go bullish on Intel:

1. Follow your OWN data analysis.

2. The stock is cheap.

3. New CEO with "accelerated" plans for the future.

4. Competitors in their "group" are doing extremely well.

5. Follow your gut feeling.

Now, based on the assumption that on May 2, 2022, Intel’s share price will increase to $65 a share, a 30% increase after 6 months I will calculate the rate of returns for a few call options using the Black-Scholes model and the implied volatility (0.282) calculated previously. The rate of return for the call option with the strike price of 50 was approximately 180%, 238% for the strike price of 60, and 221% for the strike price of 75 call option. These are all unbelievable returns!

After going through this process of call options, I would say that investing in call and put options is a smart investment strategy. I think with Intel the potential for return is there, I mean look at some of those numbers we calculated! However, the company Intel is a weary investment in my opinion. Their competitors are way ahead of them in advancement and are continuing to develop even faster than Intel. Even with Intel's new CEO and his "accelerated" plans for the future, it is still giving me an uneasy feeling as I am not certain it would be smart to go bullish on Intel right now. For this reason, I am weary to push you to invest in Intel, but as mentioned earlier and displayed throughout this blog post, the opportunity for high rates of returns are there, its just a matter of taking the risk.