OPTIONS BEAT-Prices imply a big Intel earnings move

CHICAGO Jan 15 (Reuters) - Intel Corp (INTC.O) has grabbed the attention of options players as they brace for a big swing following the chipmaker's quarterly financial report.

Given Intel's 15 percent drop in share price this year, some investors appear to be optimistic about the prospects of the technology bellwether, with some expecting a 10 percent increase in its shares by Friday, when January options go off the board.

Particularly notable are the number of contracts outstanding and speculative trades in the January calls allowing investors to buy Intel shares at $25 a piece.

"For around 15 cents a contract, this may be viewed as bargain if earnings are positive. This is a cheap speculative play," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim.

Early on Tuesday, the January $25 calls had volume of 22,851 contracts compared with the previous day's open interest of 237,818 lots.

"Many options players have been betting on a big move in Intel shares following its earnings report, despite the fact that its January options expire on Friday," said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group in Greenwich, Connecticut.

Intel will report results from its fourth quarter after the closing bell. Wall Street is expecting a profit before items of 40 cents per share, on average, on revenue of $10.8 billion, according to Reuters Estimates. Intel had previously said to expect fourth-quarter revenue of $10.5 billion to $11.1 billion.

Intel has had a rough start in 2008. All of last year's share price gains were wiped out in the first weeks of January due to concerns about limited growth and an economic slowdown, Credit Suisse equity derivatives strategist Sveinn Palsson said in a research note on Monday.

Still the uncertainty about the 2008 outlook and the sharp decline in shares has pushed up Intel's one-year implied volatility to 36 percent, 8 points above the previous two-year average as of Tuesday, Palsson said.

When investors bid up puts or calls to hedge against a decline or bet on a rally in the stock, that pushes up projected volatility -- a statistical measure related to the expected magnitude of stock movement based on option prices.

According to Credit Suisse, the options market is pricing in a 6.6 percent or $1.50 swing in Intel on the first trading day after earnings. That compares with an average move of minus 2.7 percent over the past eight quarters following Intel's quarterly updates.

Palsson recommends buying a January 2009 $25/$30 Intel call spread and selling the January 2009 $17.50 put to fund the trade for those investors who are bullish on Intel.

"Positive or in-line fourth quarter results is likely to restore investors confidence in the giant chipmaker and see Intel regain some of its share value back," he said.

Investors typically buy calls, allowing them to buy the security within a specified period, if they expect the stock to go up.

A call spread strategy may be appropriate when the cost of the option or premium is high, as in the case of Intel options. By doing a spread instead of an outright call purchase, the investor gives away some of his upside exposure to reduce his initial purchase price.

In a note last week, a team of Bear Stearns derivatives strategists forecast a 5.1 percent, or $1.10, move in Intel shares following its earnings report, while Brian Overby, option analyst at online brokerage TradeKing.com said Intel options are implying a plus or minus 4.3 percent, or $1 move.

On the other hand, there has been a slight negative bias for Intel on its earnings report, said Justin Walters, co-founder of research and money management firm Bespoke Investment Group in Harrison, New York.

The stock has beaten estimates just 56 percent of the time since 2001 and, when it has missed estimates, it has averaged a drop of 8.66 percent on the first trading day following earnings, Walters added. (Reporting by Doris Frankel; Editing by Andre Grenon)