Microsoft (MSFT) adds 92 cents to $30.75 and is the second best gainer in the Dow behind BofA today. Trading is active, with 59 million Microsoft shares and 287,000 MSFT options changing hands after the company unveiled it’s new windows-based “Surface” tablet. Options order flow on the software giant so far includes 201,000 calls and 85,000 puts, which is almost 3X the daily average.
The top (largest) options trades in Microsoft today are part of a spread, in which the investor sold 15,000 Jul 31 calls on MSFT at 81 cents to buy 15,000 Jan 30 calls for $2.62. The Jul 31 – Jan 30 diagaonal spread, for a $1.81 debit, traded 25000X on ISE and is an opening spread, according to ISEE data. If so, the call spread seems to express confidence in the stock through early-2013, but expectations for limited upside through the July expiration (31 days).
The investor is taking a position in 25,000 January 30 calls and paying $2.62 in premium ($6.55 million) to lock in the right to buy (or call) 2.5 million shares for $30 through January 19, 2013. They are helping to finance the calls by writing (selling) 25,000 July 31 calls (that are 25 cents out-of-the-money) and collecting 81 cents per contract ($2 million). Doing so, they’re stating that they’re willing sellers of the stock at $31. As we can see from the OptionsXpress risk graph, the best profits from the position happen if MSFT settles at $31 at the July expiration. At that point, the 31 calls, which are sold, expire worthless and the strategist can hold the Jan 30s or exit the trade entirely.
The risk to the diagonal spread is from a substantial move higher or lower. If shares fall, both contracts lose value and the entire debit can be lost if the position is left open and MSFT settles below $30 at the Jan expiration. If there is a substantial move to the upside, then assignment on the July 31 calls comes into play.
Microsoft shares are up 18.6 percent year-to-date thanks to strong gains in the first two months of 2012. MSFT touched a 52-week high of $32.95 in mid-March. By initiating the July 31 – January 30 call spread the strategist is basically stating that they expect shares to continue moving higher throughout the second half of 2012, but the stock might take a breather between now and the July expiration (31 days).
About the Author (Author Profile)
Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.