Trade Update $MSFT: Taking Small Gain After Roller Coaster

by CC September 13, 2013 9:34 am • Commentary

Following Ballmer’s resignation, we wanted to for a slight pullback in MSFT stock.  The pullback was more than we bargained for, and so we’ve been in premium recovery mode ever since.  We’ve been patient the last few days to see if MSFT could get above its 50 day moving average around 32.80.  But that price level has served as resistance, so we are going to take off our range trade for a small gain after a roller coaster ride in the past 2 weeks.


Action:  MSFT (32.79) Sold the Sept 36/34/32 put butterfly at $0.72 for a $0.02 gain


Original Post Aug 26th, 2013:   New Trade $MSFT – Wanna Be a Ballmer Shot Caller

Microsoft’s reaction to Steve Ballmer’s departure on Friday is a funny commentary on the market’s perception of Ballmer’s value to the company.  But a renewed optimism towards MSFT shares, with hopes of a Marissa Mayer / YHOO type turnaround in the works for this dormant giant, might be placing too much weight on a CEO’s capabilities.

First off, MSFT is a $285 billion market cap company (YHOO was around $15 billion when Mayer took over).  MSFT is involved in numerous, unrelated businesses, each with its own culture and management focus.  Whoever becomes CEO is going to have little impact on all of these moving parts for many months to come.  So the real merit of the stock should rest on its current business prospects.

At a 12.5x P/E, with 7% expected earnings growth over the next couple years, MSFT is more cheaply valued than most other large cap U.S. companies.  But relative to its own historical valuation over the last 5 years, it does not look as cheap.  MSFT has ranged between a 9x and 13x P/E for the past 5 years.

Technically speaking, in the short-term, the stock is sandwiched between 2 important gap levels, which we outlined in a CotD post on Friday.

Daily chart of MSFT, Courtesy of Bloomberg
Daily chart of MSFT, Courtesy of Bloomberg

There is an analyst meeting on September 13th that could move the stock a little but we think this range should hold for the time being and any future significant breakouts or breakdowns could come around the time of a new CEO announcement, which may not be for months.  Aside from that we would be very surprised to see any major announcement’s from a strategic nature when you consider that any outside choice for CEO would likely bring in many trusted lieutenants to help right the ship. I am not sure investors would appreciate anything other than the status quo from a lame-duck CEO, right after the announcement of his dismissal, so we expect the meeting to be a bit of a snoozer. Additionally as we head into “holiday trading” the stock could settle right in here over the next week or so into the Labor Day weekend, which could see implied vol in the name settle after Friday’s spike.

With that in mind we wanted to take advantage of the fact that Ballmer’s announcement was enough to get buyers back into the stock but not enough to break out above the recent range. With support below and resistance above, here’s the trade to isolate the range:

Trade – MSFT (34.25) Buy the Sept 36/34/32 Put Fly for 70c
  • Bought 1 Sept 36 put for 2.00
  • Sold 2 Sept 34 put at 0.75 (1.50 total)
  • Bought 1 Sept 32 put for 0.20

Break-evens on Sept Expiration :

Profits: up to 1.30 btwn 35.30 and 32.70, with max profit of 1.30 at 34.

Losses: btwn 42 & 42.70 and btwn 35.30 & 36 lose up to .70, wih max loss of 70c at or below 32 or at or above 36.

Trade Rationale:  This is essentially a risk reward trade that identifies a likely range until Sept expiration. The structure risks 70c to try to make 1.30. It has a high likelihood of being a small winner with about equal chances of being a big winner or big loser. Time is on its side as intrinsically the trade is worth about 1.75 at the time of trade. That means it has slightly more than a dollar of premium that would decay over the next few weeks if the stock didn’t move at all. That premium decay is what gives the trade better than even odds, and when combined with the 70c to 1.30 payout the trade is one with the math on your side. Obviously the stock could move outside the range and the math won’t do any good, but it’s unlikely to be in the form of a gap and if it makes a breakout move we should have time to get out for even or keep it at small losses.