Just want to ask your opinion on something we learned in a class we took. Being that INTC has taken such a big hit (called a slam in class). Why would we not do a Credit Spread (Bull Put Spread in class) on it since it is still a great company and should have found support at these prices. Maybe a 40 and 35 spread?? If you have time your comment would be very much appreciated. (September 25, 2000)
There are times when we think a stock has been hammered and we feel it will recover. That may prove to be a good time to take a long term position or make some other type of play on it. With INTC, we are not sure this is the time to do that. Yes, it is a great company and a leader in the PC chip business. It is also branching out into other types of chips for the newer wave of hardware that is here and coming. Still, the company has not made that shift yet. Moreover, it has warned that its earnings will not be great the third quarter, and there is a lot of doubt about the fourth quarter.
With that kind of sentiment out there, it may be awhile before the stock starts to move back up. As we saw today, it tried to bounce and a lot of investors were sucked in. It sold back once again on heavy, heavy volume. Writing a bull put spread on a stock that has not established a bottom is risky. The spread you described is well out of the money right now, but INTC has not shown its fall has stopped. We prefer to write put spreads on stocks that are showing they are going to move up, clearing resistance or breaking out of bullish patterns. INTC may be a great buying opportunity right now, but the question is, when will it stops its slide and turn back up? It is probably close, but probably is not good enough for us. We want to see it moving back up and some good feeling behind it.
Now you can make money on a spread as long as it does not breach the top of the spread, i.e., the strike you sold. But why step in front of it now and risk sleepless nights? Time is on your side, but the stock is still falling, and many questions won't be answered until the fourth quarter. Look at how MSFT has languished. Another point on slam plays. If the stock is sold hard on bad news, the bounce can be muted, and selling can resume again. We prefer to see a stock slammed on no news or BS news as it has a better chance of bouncing. Example of BS news? NTAP being downgraded because of valuation. Your greatest stocks will be overvalued by traditional standards. This is going to give us good buy in NTAP once the news subsides. Nothing long term against the company; just one analyst's view as to what is 'value.'
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