Microsoft reports their fiscal Q2 results tonight after the close, the options market is implying a one day move of about 2.5% which is greater than the 4 qtr avg of only about 1.25%.
The stock is basically flat in on the year, but from a technical standpoint it’s showing some waning momentum, down 7.5% from the 14 year highs made in November, after making a series of lower highs, and lower lows:
The implied move of about $1.15 seems fairly reasonable as it would be a move back up to the downtrend line which happens to correspond with the stock’s declining 50 day moving average (purple) or down to last week’s low just above $45 just above the lower band of the downtrend.
It is my sense that, despite Wall Street analyst’s mixed ratings on the stock (24 Buys, 18 Holds and 4 Sells), there is a bit of pent up positive sentiment in the stock due to investor’s love affair with relatively new CEO Satya Nadella.
But once the honeymoon is over with Nadella, and we get closer to the end of the recent period of PC stabilization, investors will once again focus on the very low growth profile of the company as the stock’s P/E approaches 7 year highs, at a market multiple:
But the company’s balance sheet ($89 billion in cash and growing, $65 billion net of debt, equaling 17% of their market cap) makes the ability for increased capital return (possibly a special dividend, or beefing up their 2.67% dividend yield) likely and should have shorts take pause. And what about the potential for a transformative acquisition? I suspect the company makes some big strategic moves in 2015, a year that Satya Nadella puts his imprint on the company that has been dominated by two long time leaders.
So what to do with the stock?
My sense is it is probably range-bound between healthy support at $42 on the downside and the prior high at $50 on the upside:
[caption id="attachment_50233" align="aligncenter" width="600"]
MSFT 1yr chart from Bloomberg[/caption]
Earlier in the month I highlighted some call activity that looked to be some over-writing of longs (investors selling calls against long stock to add yield, watch here.)
The one year chart below of 30 day at the money implied vol shows it below levels of where it is has been prior to the last few quarters, likely the result of some of this call overwriting of late:
[caption id="attachment_50234" align="aligncenter" width="600"]
MSFT 1yr chart of 30 day at the money IV from Bloomberg[/caption]
In the near term longs could consider call sales as a way to add some yield, the Feb 48 calls at .50, or a little more than 1% of the underlying, could be a decent near term sale. Do know that the call-away level at $48.50 is up 4.3% in less than a month so one needs to be fine with that sort of sale.
For those looking to play the range, and essentially sell the move in the money call butterflies could be a way to express this view. For instance with the stock at $46.50 you could buy the Jan30th weekly 44.50 / 46.50 / 48.50 Call Fly for 70 cents, making your break-even at $45.20 on the downside, and $47.80 on the upside, between those levels you would make money, your max risk would be 70 cents on an out-sized move below 44.50 or above 48.50. This is threading the needle a bit but has a decent probability of making money. Wider Feb flies give you more room but also more time for the stock to have a post earnings run in one direction or the other.
We don’t have a strong opinion, but INTC’s reaction to its results a couple weeks ago could be used as a guide. They beat and had a mild guide down and the stock did not move much. I suspect we could see similar in tonight’s report.