MSFT: Implied Vol Looks Cheap Heading Into Their Fiscal Q2 Report Jan 19th

by Dan January 4, 2012 3:02 pm • Commentary

MSFT is on fire out of the gate this year up 5.5% in less than 2 trading days…..what got me looking at the name is that someone just bought 10k of the MSFT Jan 27.5 calls tied to stock at 27.25 for .47.  

With the company’s fiscal Q2 earnings to be reported Jan 19th after the close, in Jan expiration, this looks like very cheap implied vol, offered at about 23, vs the 30 day and 60 day realized vol of about 22 and 23 respectively.  The move looks like it is priced fairly cheaply.  One caveat though, the stock is not a big mover on earnings, averaging about 2.25% over the last 4 reports.

I am going to do more work on the quarter as we get closer, but with the stock up so sharply in such a short period of time I am going to pick a direction and Buy some Jan Puts.

TRADE: MSFT $27.40 Bought the Jan 26 Puts for .14

Break-Even on Jan Expiration:

Profits below 25.86

Loses of up to .14 btwn 25.86 and 26.00, and lose all .14 at 26 or above.

Trade Rationale:  This is by no means a high conviction trade, but with vol so cheap (downside is a  bit more expensive as you would expect) that I would rather pick a direction since the stock has had such a quick run.  I picked the 26 strike for a couple of reasons; first because there is no 27 strike in Jan, and second because 26 is the level the stock started the year and I think any earnings disappointments in the space or a broad market decline prior to their own report could see the stock re-test that level.

So to be clear this is not a high conviction trade, and it is not exactly a trade into earnings. but with implied low, owning these puts almost gives you a free look heading right into their release as the puts should stay bid in front of the event, unless at least the stock continues to rally and stray further from the put strike.