Trade Update $MSFT: Closing Nov Puts For Flat in Front of Earnings

by Dan October 23, 2014 3:13 pm • Commentary

Less than two weeks ago when it felt like the bottom was falling out of large cap tech stocks, I made a defined risk bearish trade in MSFT with the notion that the dramtic  weakness in semiconductor stocks would spill over to others in the PC/smartphone supply chain.

From the time I put the trade on when MSFT was $45.60, the stock declined to $42.10 on October 15th and has since rebounded back to $45.05, just below where I entered the trade.  Unfortuntely for me, I got a bit greedy, and did not manage the trade by taking profits or spreading the puts to reduce my break-even.  And now with MSFT’s fiscal Q1 earnings due after the close, I have a decision to make.  The original intent of the trade was not an earnings play, it was a momentum and sentiment play.   Taking a scorecard, downward momentum has halted and sentiment is near euphoric again.

The Nov 45 puts that I bought for $1.25 on Oct 10th are now unchanged, and I am going to close for even as I do not have any particular view on how the stock will react to strong results.  I think if the market looks like it does today, then come tomorrow, the stock will likely be up.  My odds are much worse than a coin flip with a long premium trade into an event with the certainty that implied vol will come down tomorrow.

ACTION: MSFT ($45.05) Sell to Close Nov 45 Puts at 1.25 for flat


Original Post October 10th, 2014: New Trade $MSFT: Honeymoon Period is Officially Over for Satya

Weakness in the Semiconductor sector today feels panicky.  The sub-sector in tech had been a relative out-performer for most of the year, with the Philadelphia Semi Index (SOX) up almost 25% in mid September, trading at new 10 year highs.  Since Sept 19th, the SOX is down almost 15%, and 6% today on the heels of a warning from semi maker Microchip Technology (down 13% today).

SOX 1yr chart from Bloomberg
SOX 1yr chart from Bloomberg

Semiconductor sales are probably the most cyclical component in the PC/Smartphone supply chain, and with the maturation of some growth sectors, and the cannibalization of others, coupled with the timing of product cycles, these companies are susceptible to quick dramatic turns.

It is likely a bit too soon call the top in large cap tech, but regular readers of the site know that we think most low growth, large cap tech stocks with large buybacks masking little-to-no revenue growth are a fairly crowded trade.

Additionally, I think today’s price action in parts of tech is anything but orderly, with weakness spreading quickly to telecom equipment stocks, software and internet.  I believe this weakness is significant and will see follow through as we get into the heart of Q3 earnings season.

We have been laying out shorts on rallies, but today’s price action feels like the sort to press on a down day. Without getting into to much detail, it is my sense that MSFT shares have benefited from the sort of honeymoon period asigned to new CEO Satya Nadella, and some misperceptions of positive shifts to cloud-based products.  It is my sense that a broad tech sell off will not spare MSFT shares.

Implied vol is still relatively inexpensive given what looks like a precarious technical setup with the stock sitting right on its 50 day moving average:

MSFT1yr chart from Bloomberg
MSFT1yr chart from Bloomberg

A break below the 50 day (purple) could yield a break to the 200 day (yellow) down below $42 in the coming weeks.

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

Rationale:  We will look to spread this put and turn it into a put spread if MSFT declines below $44 in the short-term.  We decided to buy an outright put instead of a put spread to start because implied volatility remains in the low-20’s, which is not much above the broader Nasdaq index implied volatility as traders reach for protection.  Our thought is that the next decline in MSFT will likely cause a spike in implied volatility, into which we will look to sell some premium on the downside and turn the trade into a spread.