Chip stocks have surged 15 percent from their 2018 lows in early February, and trader and CNBC contributor Todd Gordon believes Intel is the chip name to buy.
“Intel and the rest of the chips have performed very well in this recent period of volatility that we’ve seen,” the founder of TradingAnalysis.com said Thursday on CNBC’s “Trading Nation.”
According to Gordon, Intel is seeing an “expanding volatility pattern.” In this case, the stock is making higher highs and lower lows, creating a sort of reverse wedge. “In most cases you get a triangle, which is a consolidating pattern, this is an expanding volatility pattern,” he said.
“It does seem to be resolving on the topside through this $51 mark,” he added. “I think heading into earnings on April 26, we should have a shot to move on up towards that $55 region.”
To trade this move up to $55, which would be a multiyear high for Intel, Gordon wants to look at a butterfly spread. The trade essentially has Gordon selling two calls at the same strike at the body of the butterfly, and then buying one call at a higher price, and one at a lower price.
In this case, Gordon wants to sell two of the April 13 weekly 55-strike calls, and then buy the April 13 weekly 50-strike calls and the April 13 weekly 60-strike calls. The trade costs Gordon about $1.60, which is the maximum amount Gordon can lose if Intel closes below $50 or above $60 on April 15 expiration, based on the format of the trade.
In a butterfly spread, a trader would make the maximum reward if the stock closed at the price of the butterfly’s body. For Gordon’s trade, this means that should Intel close at $55 on April 1, he could make a maximum reward of $335.
But since profits begin to trail off as the price gets further away from $55 in either direction, Gordon wants to make sure he has a point at which to get out of the trade.
“I want to try and make 25 percent return off that $1.60,” he said, meaning that he’d get out of the trade as soon as he gets a $2 return on the trade.
Intel closed at $50.74 on Thursday.