I've got a short-list of companies that I'm looking to purchase and hold for a year or two. Intel (INTC) is one of those companies.

Reasons to hold

First there is the dividend. Even if the stock goes nowhere, I stand to make a 3.61% return right now just from the dividend income. It's hardly going to make me rich, but it's certainly better than letting my money sit in the bank.

And by most fundamental measures, Intel is leading their sector. They're among the best when it comes to returns from reinvesting their earnings, have the highest gross margin, and the best operating margin. Yet their stock hasn't moved a huge amount in the past 3 years, mostly bouncing between $20 and $30.

A large part of that has been the decline of the PC business and the growth of mobile/tablet devices. I think that is all set to change. Their new low-power processors are among the best (Intel Haswell is what is in the recently announced 13" Macbook Air with 12 hour battery life) and they've finally landed contracts with tablet producers.

Early days, but I'm willing to sit on this for a while and I think the downside is limited thanks to the dividend.

The trade

So I bought 500 shares of INTC today @ $25.34. But that's not very exciting, so lets spice it up a little bit by writing some covered calls.

Now that I own 500 shares, I can sell 5 option contracts (remember, each contract is for 100 shares), and pocket that money from someone else. The Jul 20th call at $27 was at $0.22 when I placed the trade. So I sold 5 call options, and netted $110 ($0.22 * 5 contracts * 100 shares per contract). My initial outlay to by the stock was $12,670 (500 shares * $25.34), so that's an immediate return of 0.86% (not considering brokerage costs). It doesn't sound like much but through the power of compounding interest, in some fantasy land where I could do this reliably each and every month it'd net an almost 11% return for the year.

What's the catch?

Every trade has risk, and on this one there are two to take into consideration:

  • What happens if the share price drops significantly?
  • What happens if the share price goes above $27?

It always sucks if shares you own drop in price, in this instance I don't particularly care too much. I'm willing, and hoping, to hold Intel for a year or two and I'm willing to ride out any rollercoaster action in between. So the first risk isn't really a risk given my objectives.

If it goes above $27, then I'm going to have to sell all my Intel stock. That really doesn't fit with my long-term objectives, but it means I'd make a 7.36% return in a month. I'd happily take that money and look to re-invest it Intel when I saw another buying opportunity, or put it into something else that is on my watchlist.

Published on in Trades