Big Printin’ – $MSFT Surface Friction

by Dan January 20, 2016 4:05 pm • Commentary

I am not sure about you, but when trying to arrive at an oversold condition in a single stock, I often look for prior support, or a technical level that sticks out like a sore thumb. Depending on how you look at it, we traders are fortunate enough to have the morning of Monday August 24th as a sort of sentiment beacon, the day that some of our most loved stocks traded at crash levels before recovering and never looking back.

Microsoft (MSFT) is one of those stocks. It traded down more than 10% in two trading days, before putting in a sharp reversal that yielded a 43% rally from its August 24th lows to its late December highs.  MSFT has shown tremendous relative strength to many of its mega cap peers, with the stock now 28% above its Aug 24th low:

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

The one year chart above is fairly astounding, with prior resistance of $50 now serving as important support, with $40, prior long term support, a distant memory.

MSFT is scheduled to report fiscal Q2 results on January 28th after the close, the options market is implying about a 6% one day move, which is shy of its 4 qtr average of about 8.3%, but well high of its 10 year average of 4.3%.

So What Traded Today?

Options volume in MSFT is ran hot today at 1.5x average daily volume, with calls outnumbering puts nearly 1.3x to 1.  While much of the call volume looks to be bullish, calls spreads bought to open, they look to be financed with opening sales of downside puts. Which means even more bullish, not only is the trader willing to commit premium to their bullish view but they are also willing to be put the stock at levels below the market.

For instance when MSFT was $50.35 a trader sold 3500 Feb 26th weekly 47.50 puts to open at 1.40 and bought to open 3500 of the Feb 26th weekly 52.50 / 55.50 call spread for 87 cents, resulting in a 53 cent credit for the trade.  This trade breaks-even on the upside at $51.97 with a max gain of up to $3.53 between 51.97 and 55.50 with max gain above $55.50 not far below the 52 week highs of $56.85 made on December 29th, 2015.  On the downside, above 52.50 and below 55.50 the trader will receive the 53 cents in premium received for what we call a call spread risk reversal, with losses as if long 350,000 shares below $47.50 (less the 53 cents premium so really at $46.97, down almost 7% from the trading level).

We are in the sort of market where from purely a volatility perspective (the price of options are at their highest levels since August) it makes sense to be net short premium for directional players. With one caveat, if you think the market feels a bit crashy, then it may make sense to shy away from naked short put positions.