Considering Our Options – And $MSFT Started To Grind

by Dan February 24, 2015 10:50 am • Commentary

A couple weeks ago we made a bullish trade in MSFT targeting what we feel was the potential for the stock to fill in its earnings gap from late January. To refresh, here was 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

With the stock at $44.05, up about 2.5%, the call spread is now worth about 60 cents and quickly approaching overhead resistance in the form of the 200 day moving average and (converging 50 day).

Screen Shot 2015-02-24 at 8.47.17 AM
3 month MSFT from LiveVol Pro

 

A little higher, when the spread is worth 2x what we paid or more we may consider selling half and taking our cost off of the table. Stay tuned.

 

 

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Original Post Feb 12th, 2015: New Trade – $MSFT: Surface to Air?

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:

MSFT 20 day chart from Bloomberg
MSFT 20 day chart from Bloomberg

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:

EXPE 10 day chart from Bloomberg
EXPE 10 day chart from Bloomberg

and QCOM earlier over the last week:

QCOM 20 day chart from Bloomberg
QCOM 20 day chart from Bloomberg

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:

MSFT 1yr chart from Bloomberg
MSFT 1yr chart from Bloomberg

Short dated options prices have come in hard in the last couple weeks making directional long premium trades attractive:

MSFT 1yr chart of 30 day at the money IV from Bloomberg
MSFT 1yr chart of 30 day at the money IV from Bloomberg

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.