Event: MSFT reports its fiscal Q1 earnings today after the close. The options market is implying about a 3.25% one day move, which is above the 4 qtr avg of about 2% but just about in line with the 8 qtr avg of about 3.5%.
Sentiment: Wall Street analysts have been relatively mixed on MSFT, with 21 buys, 21 holds and 2 sells, with an average 12 month price target of $49.30. The stock has been one of the mega cap leaders in 2014, up 19% year-to-date, and is trading at its highest level since early 2000. Short interest is negligible at 1.3% of the float.
Options Open Interest: Open interest in MSFT is nearly evenly split between calls and puts. The average volumes over the past month have been nearly evenly split as well. The bulk of the open interest is concentrated in Jan15, between the 40 and 45 strikes. In Jan16, the 45 call line has nearly 70k of open interest.
Price Action / Technicals: MSFT has been in a very steady uptrend over the last year, remaining above its 200 day moving average throughout that time:
The stock had held above its 50 day moving average for most of the period since February, and the recent rally has not retaken the 50 day ma. That is about 2% away at $45.50. On the downside, the $42 level is obvious support, from where the stock bounced last week.
Volatility: Options pricing has moved lower in the past week, and MSFT 30 day implied volatility is now lower than where it has been prior to the last 4 earnings reports:
Given the recent volatility, options would probably be cheap if implied volatility moved back down to the mid-teens after the event.
We placed a bearish bet in MSFT two weeks ago with the stock about a dollar higher:
TRADE: MSFT ($45.60) Bought to Open Nov22nd 45 Put for 1.25
Break-Even on Nov22nd Expiration:
Profits: below $43.50
Losses: up to 1.50 btwn $43.50 and $45, max loss of 1.50 above $45
The puts are marked at a slight profit here and depending on what the stock does in the next few hours we’ll look to either close those or possibly spread them by selling a lower strike put. We’ll update on the site when we decide later today.
PLEASE NOTE THAT FOR OPTIONS ACTION THAT AFTERNOON I DETAILED THE NOV 44 PUTS RATHER THAN THE NOV 45 PUTS THAT WE TRADED AND POSTED ON. THIS WAS BECAUSE THE STOCK HAD DECLINED A 3% BY THE DAYS END.
On this past Friday’s Options Action I detailed how I would manage this trade, watch here:
At the moment the Nov 44 puts are a loser after being a nice gainer, and at this point the decesion is whether or not you want to take event risk into earnings.