MorningWord 12/9/13: $MSFT Options Traders Fading Edsel Ford the Second

by Dan December 9, 2013 9:25 am • Commentary

MorningWord 12/9/13:  Last week MSFT shares closed at new 13 year closing high, levels not seen since the internet bubble burst.

MSFT 14 yr chart from Bloomberg
MSFT 14 yr chart from Bloomberg

Despite the weekly highs, the stock edged just a small week over week gain, despite a mid week peak to trough move of almost 5%.

MSFT 6 day chart from Bloomberg
MSFT 6 day chart from Bloomberg

The volatility arose from comments on Thursday from a Ford member Edsel Ford II ( I swear that’s his real name) that current Ford CEO Alan Mulally (who by most accounts appears to be the front runner to replace MSFT CEO Steve Ballmer) “told us his plan is to stay with Ford until the end of 2014”.  That comment sent the shares reeling.   The stock later rebounded as Mulally was asked by a reporter on CNBC about the earlier comment and he stated “we do not comment on speculation”, which many market participants and pundits viewed as a fairly lame attempt to suggest that he is still very much considering the role if offered despite what his board says.

Many media reports, quoting those close to the situation have suggested that MSFT’s board would like to name Ballmer’s successor by year end, and that we could very likely get an announcement any moment.  Last week’s price action makes it fairly obvious that investors have already made their minds up that anything short of Alan Mulally would be a disappointment.

One analyst who is very close to the MSFT story, and has been since the 1980s when he was Goldman’s Sachs software analyst (GS took MSFT public), is Rick Sherlund.  He is now at Nomura, and firmly stated in a note to clients and on CNBC that Mulally is still the front-runner (here).

Options traders are clearly positioning for a break-out move in the near term, and my assumption is that the recent call buying can only be attributed to those who think MSFT’s board’s decision will be one of an outside candidate like Mulally.

On Friday the most active options line in MSFT was the Jan 40 calls, with 40,600 trading with an avg price of about .645, most being bought to open.  On Thursday’s dip, traders were looking for short dated calls with over 100,000 of the Dec 39s trading at an average price of about .37, with many of them buys to open as prior open interest in the strike was only 47,000.

I’m still of the view that Mulally would be a terrible choice for the long-term fortunes of MSFT. The company has ridden the coattails of its software business for more than a decade while apart from Xbox,  mostly having failures in side businesses along the way ($17 billion in losses of its search biz and still counting to the tune of $1.5 bill a year).  It needs innovative, disruptive managers to lead it over the next 5 years, and I don’t think Mulally fits that bill.  But for now, the short-term price action indicates that the momentum traders would be happy to see him fill the CEO seat.