At the onset of earnings season we saw a handful of gaps lower in stocks that reported results below expectations. There were few that were as pronounced as the 9.25% one day decline by MSFT on Jan 26th. Since then the stock has made back a portion of the losses, and nwo threatens to enter the gap:
The stock caught my eye as there have been a couple high profile gaps lower in large cap tech in the last week that have been filled, like EXPE today:
and QCOM earlier over the last week:
With the broad market now threatening another breakout to new all time highs, this stock would likely fill in a portion of the earnings gap if this were to happen:
Short dated options prices have come in hard in the last couple weeks making directional long premium trades attractive:
Yesterday there was some call buying that looked opening, when the stock was 42.50 there was a buyer of 24,000 April 45 calls, and 24,000 May 45 calls, paying .38 and .76 respectively. So what’s the trade?:
TRADE: MSFT ($43) Bought the March 44/46 call spread for .34
-Bought to open 1 March 44 call for .44
-Sold to open 1 March 46 call at .10
Break-Even on March Expiration:
Profits: between 44.35 and 46, make up to 1.65 with max gain of 1.65 above 46
Losses: up to .35 between 44 and 44.35 with max gain of .35 below 44
Rationale: March expiration catches the next FOMC meeting. The market tends to rally into these 🙂 MSFT will participate in a broad market rally, and a reasonable target would be a portion of the gap fill. This is a cheap way to play for that gap fill with great reward if it happens.