A couple weeks ago we made a defined risk trade that MSFT would follow a few other large cap tech stocks in an effort to fill in their lower earnings gaps as broad market sentiment improved. MSFT has rallied close to 10% from its post earnings lows, and nearly 2.5% from where we entered the trade (below) but has lost a bit of momentum at the $44 level, and is potentially making a troubling technical formation called a death cross (the 50 day moving average crossing below the 200 day):
The waning momentum off of the stock’s lows, the weak results and price action from large enterprise vendor HPQ this week, and the impending death cross have me looking the other way on MSFT all of a sudden (a short biased trade could be coming).
So I am now going to book a small gain and take another look. My bullish trade idea was NOT predicated on a bullish fundamental thesis, merely a technical set up.
ACTION: Sell to Close MSFT ($43.85) March 44/46 call spread at .48 for a 14 cent gain.
This was obviously not the intended result, but a small gain certainly beats a sharp stick in the eye.
Update for Options Actions viewers. I detailed the purchase of just the March 44 calls on the Feb 13th show (read here), this update should serve as my official view for that trade idea. I just don’t like the set-up here and want to take a closer look once neutral. so small loss, or small gain could quickly turn into a loss of most of the premium at risk if the stock is unable to establish a new range above $44 and quickly.
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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:
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.