Chip stocks are getting crushed.
Shares of Micron, Intel and Advanced Micro Devices have fallen a respective 50, 19 and 24 percent year-to-date, vastly underperforming the Nasdaq Composite index, up 4 percent in the same period. And according to one trader, the recent selloff in the broader average and collapse in China's stock market could cause even more pain for one name in particular: Intel.
Gordon noted that the chart of Intel has formed a head and shoulders top. This is a pattern that technicians often recognize as a reversal in trend. "You can see this move is clearly defined, and it looks like we're going to get a move down past the neckline of this pattern," said Gordon, founder of TradingAnalysis.com. "I think we could see a move down to $28." And Gordon believes the catalyst for the move lower could be the company's fiscal 2015 earnings release on July 15.
So to make a bearish bet on the stock and capture a potential decline on earnings, Gordon turned to the options market. Specifically, Gordon purchased the July 30.5-strike puts for $1.75 each. Since buying a put option allows a trader to sell a stock at a given price for a set time, this trade is profitable if shares of Intel fall below $28.75 by July expiration, or by next Friday.
"This is a good way to play Intel to the downside, as we expect to see increased volatility heading into earnings," added Gordon.
Intel is expected to report second-quarter earnings of 51 cents on July 15 after the bell, according to FactSet.
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