Name That Trade(s) – $MSFT: A Window Into Tonight’s Earnings

by Dan October 22, 2015 2:02 pm • Commentary

Event: Microsoft (MSFT) reports fiscal Q1 results tonight after the close.  The options market is implying about a 4.5% one day move, which is shy of its 4 qtr average of about 6.5%, but in line with the 10 year average of about the same.

My Take: I have been less than positive about companies in the PC supply chain, and recent data points about the lack of PC growth, and weak enterprise demand does little to change my mind. That said, the recent m&a in semiconductors and computer hardware has changed the sentiment dramatically, and today’s price action makes my view downright wrong.

Price Action / Technicals: After this month’s 10% rally in the shares, the stock is now up 5% on the year, and quickly approaching the upper end of the $40 to $50 band the stock has traded in for the last year:

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

For those who are keeping track at home, some large cap range-bound stocks are breaking out in a big way, here are two today McDonald’s (MCD) and Pepsi (PEP):

MCD 4 year chart from Bloomberg
MCD 4 year chart from Bloomberg


PEP 1 year chart from Bloomberg
PEP 1 year chart from Bloomberg

In a market that seems to have shorts trapped and cautious bulls chasing, breakouts can be a powerful way to play catch-up in a quick way.    

Options Open Interest:  open interest has been increasing of late, specifically calls as they outnumber puts 1.5 to 1.  Over the last five trading days call volume has outnumbered puts 3 to 1.  On Monday there was an interesting trade that caught my eye when the stock was $47.23 where a trader bought 19,000 of the Oct 30th weekly 49 calls for .36 to open and 19,000 Oct 30th weekly 50 calls for .16 to open.  This is a fairly bulky, but low premium, short term bet that the stock breaks out.   Again, we have no idea if this was an outright bullish bet, it could be protection against a short position, stock replacement, who knows, but it was followed up the next day with some opening buying in the Nov 48 calls, 16,000, and yesterday a buyer of 23,000 of the Oct 23rd weekly 47 calls, at least some were opening.

How to Trade it?  Its been my view to sell the stock in the high $40s and buy in the low $40s for the last year.  But I get that the recent price action in large cap tech suggests that maybe we are looking past recent headwinds to earnings growth.

For those who want to play for a breakout, you may want to consider the following trade:

Bullish: MSFT ($48.75) Buy Jan16 50 call for $1.35

Rationale: longer dated options look dollar cheap, and if the stock is set to breakout above the recent range there is plenty of room to run, and it could go for a while. I would look to spread these long calls on a move above the strike.  Risking less than 3% of the stock price.


Bearish: MSFT ($48.75) Buy Nov 49 /45 / 41 Put Fly for $1

-Buy 1 Nov 49 put for 1.70

-Sell 2 Nov 45 puts at .40 each or .80 total

-Buy 1 Nov 41 puts for .10

Break-Even on Nov Expiration:

Profits: between 48 and 42 make up to 3, with max gain of 3 at 45

Losses: up to 1 between 41 and 42 & between 48 and 49 with the max loss below 41 and above 49

Rationale:  short dated options are expensive, the stock could be a tad overbought, and a miss and guide down and the stock would likely back towards its 200 day moving average near $45, the mid point of the one year range.


So take your pick, mean reversion or a return to bull market breakouts.  Ill just lay it out so you can play it out.