2nd Trade Update MSFT: Looking to Close One Leg of Oct Put Spread Shortly After Open

by Dan October 19, 2012 9:27 am • Commentary

2nd Trade Update Oct 19th, 2012: See my comments below from the MorningWord re: MSFT’s qtr and future, we are far from optimistic.  But with the stock only down 2% pre-open despite the miss, my Put Spread expiring today at 4pm will start to get hit hard from a decay perspective once it appears the stock is not poised for a significant move.   I will likely just close the Oct 29 puts that I am long and let the Oct 28 Puts that I am short expire worthless. I will keep a very close eye on the 28s this morning as I would not want to be caught short them on a sharp move lower today. If the stock did start to move lower quickly I would close them as well. For those looking for instant commentary, please keep an eye on “Quick Hits” as that is the most reliable and quickest form of updating.

As I state Below, I will look to roll this position.

MSFT comments from the MorningWord 10/19/12:

MSFT.   Last night the company reported their fiscal Q1 that saw revenues slightly below expectations, and EPS .03 worse than consensus.  One of the main tenants of the bear case is affects of mobile computing on MSFT’s Windows franchise which, despite deferrals for Windows 8 (launched next week) the segment was down high single digits year over year.  Given the recent results from DELL, HPQ, AMD & INTC and the PC shipment data from research firms Gartner and IDC earlier in the month, this should not come as a huge surprise.

While many investors are squarely focused on the presumed upgrade cycle for Windows 8 (we think cycle would be massively overstating what we feel will be a mandatory upgrade by all of those who are still on XP and will need to upgrade because MSFT plans to stop  supporting XP in 2014) but the recent pricing of MSFT’s Surface tablet at a starting point of $500 may be more instructive to the future of the company.

Henry Blodget of Business Insider had a great post this morning about MSFT’s chances to compete in mobile, in short he sees that they have no chance given AAPL and Androids formidable lead, but as he states,

there is very little chance that Microsoft and its hardware partners will ever be able to turn around Microsoft’s fortunes in mobile. But any chance is better than no chance. So these product launches are critical.

The computing world has faced a dramatic shift of late, as Blodget notes:

Last year, in the most profound change in the computing market in two decades, more smartphones and tablets (mobile) were sold worldwide than PCs (see chart below). Overall, Windows has only a tiny sliver of this mobile market. The more share Microsoft loses in mobile, the more share Microsoft loses of the overall personal computing market. And the more share Microsoft loses in the personal computing market, the less valuable Microsoft’s “platform” becomes.

Global Internet Device Sales From Business Insider


It is our view that Surface, as will Windows phones will be DOA, and MSFT will be left to make one or many trans-formative acquisitions to just stay in the game as a  distant number 3 player on the platform level.

I am long an Oct 29/28 Put Spread that expires on the close today, with the stock down only 2% in the pre-market, I will look to close and roll out a bit.  As Enis mentioned yesterday in his Q1 preview of MSFT, the 3% dividend yield, rock solid balance sheet and valuation at multi-year lows should buoy the stock to some degree, but we see no reason why lackluster sales of Windows, their own hardware and a general sense of apathy towards their products but consumers and businesses a like should cause a reset in valuation despite optics that could suggest otherwise.


Trade Update Oct 18th, 2012: DAN:  

Action: MSFT (29.40) sold the Oct 28 put at 0.09, now long Oct 29 / 28 put spread for 0.13

Break-Even on tomorrow’s close 28.87 or lower

Idea here was to try to leg into a near the money put spread using the broad tech weakness, at this point I am risking .13 to make .87 if the stock is down 5% tomorrow, which given the results and reactions by INTC, IBM and GOOG in the last few days this is not a massive stretch.

Here is the thing, there is a lot of bearishness in PC supply chain and maybe the quarter they will report reflects that, but the guidance could reflect optimism about Windows 8 release.  SO i am taking a low risk, low premium defined risk bet.



New Trade Oct 18th, 2012: DAN: On Friday I took off a winning Oct Put Spread when the stock was ~$29, I am now getting back in……

New Trade: MSFT (29.55) bought the Oct 29 Puts that expire tomorrow for .22.

Break-Even on tomorrow’s close 28.78 or 2.6% lower …….given GOOG’s price action, the 29 puts look cheap in vol and $ terms.




Original Post Oct 18th, 2012:  MSFT Q3 Earnings Preview

Event: MSFT reports earnings today, Oct. 18th, after the close.  The stock is implying a 2.75%, almost in line with the 4 quarter averaged of 3.25% and 8 quarter average of 3%.  MSFT has rallied on 4 of the last 5 earnings releases.

Sentiment: Wall Street analysts are relatively bullish, with 29 buys, 12 holds, and 1 sell.  Short interest is quite low, at 1.35% of float according to Bloomberg, but it has almost doubled in the past 6 months.

Fundamentals: Microsoft has a pristine balance sheet, as its $60 billion of cash is enough to cover all of its liabilities, and then some.  Its main issue has been earnings growth, since there has been none in the past year.  Analysts and investors expect that the Windows 8 will deliver earnings growth of 20% over the next year.  That will be the crux of the trading story in the months to come.

So instead of analyzing financial metrics that everyone can see, the real question is, will Windows 8 succeed?  Will its related product cycle (tablets and PCs) be enthusiastically adopted by consumers?  Can it gain any traction in mobile?  

Reviews so far have been mixed.  I’ve seen quite a few tech blogs claiming that Windows 8 will be the downfall of Microsoft.  The platform is just too confusing, too complicated.  But they’re has been a vocal minority who says that Windows 8 software provides the necessary platform and flexibility to serve all the various product types.  These advocates say, once consumers get over the learning hurdle, the Windows 8 upgrade will be powerful.  Will they make the effort to get over the hurdle?

Valuation:  The P/E multiple is near 5 year (and all-time) lows, as the stock has lost its growth mojo, but offers an attractive 3% dividend.  Of course, as we saw with INTC, that 3% dividend yield can become 4% quite quickly if investors start to see the overall business as declining.  Here is the 5 year chart:



Once again, I don’t view current valuation as a good argument for bulls or bears.  Windows 8 will show whether Softee can grow again, or if those days are over.

Price Action:  This 3 year chart is one of the most boring I’ve come across in the entire market:



I didn’t even draw any annotations because the range has been so tight (approximately 24 to 32).  I would note that MSFT is still up almost 15% year-to-date in 2012, close to in-line with SPX and Nasdaq.

Volatility:  The chart of 90 day implied volatility over the last 2 years shows how traders are unwilling to buy options on MSFT.  Given that the stock has been stuck between 28 and 32 for most of the year, that’s no surprise.  Chart:


from LiveVol Pro


Options are cheap because the stock has not moved.  But I do think we are close to a period where option buying in MSFT will make sense, as speculation around Windows 8 heats up.

My View: Today’s earnings is likely to be a non-event, and I see very little of interest in the options market.  However, we are approaching the Windows 8 release, and its success or failure should cause a rather large move higher or lower over the next year for MSFT.  I anticipate some good trading opportunities around that event.