Shares of Microsoft are up 3.5% today, its largest one day gain of the year, bringing its losses for the year to about 7%. There does not appear to be any news in the stock today, but it fits the my discussion from the MorningWord earlier about low expectations from for large U.S. multi-nationals that had a rough Q1 on weak guidance related to the strength of the dollar. Much like INTC, MSFT has two very large headwinds given their dependence on the weak PC market, and their exposure to the strength of the dollar. The bear case in both stocks was well known, and frankly it appears that U.S. investors seem far more comfortable speaking constant currency terms for corporate earnings than they did only a few months ago during Q1 reporting season in January.
MSFT will report their fiscal Q3 earnings Thursday after the close and the options market is implying about a 3.5% one day move following the print which is tad rich to the 4 qtr avg of about 3%. It is important to note that the average is skewed by last quarter’s 9% one day decline.
In conjunction with today’s strong stock gains, options volume is running hot at 2.5x average daily volume, with calls outpacing puts 2 to 1. There were two trades that caught my eye today, both apparently bullish.
First when the stock was 42.42 a trader bought the July 37/ 45 Risk Reversal 15,000x, selling the July 37 put at .27 and buying the July 45 call for 47 cents. This trade was done tied to stock, so a bullish risk reversal where the trader sold about 500,000 of stock on a 33 delta. This could have been stock replacement.
The largest block in the stock today was a buy of 25,000 May 44 calls for .47 when the stock was $42.62, but these look closing, and likely a long holder closing an overwrite as they were marked closing vs 49,000 of open interest.
It is important to try to differentiate between opening buying in front of an event like earnings as not all buys are created equal. If this was closing an overwrite this investor probably sold the calls to add yield when they did not think the stock would be over $44 on May expiration, but now as the stock catches a bid, and stocks like INTC are reacting well to bad news they are apparently looking to not have potential gains capped.
The one year chart below shows the risk of a gap fill on the slightest bit of good news:
[caption id="attachment_52928" align="aligncenter" width="600"]
MSFT 1yr chart from Bloomberg[/caption]