This Blue-Chip Tech Stock Could Blow Up

by Andrea Kramer |

Published on May 19, 2017 at 11:12 AM

Traders can scoop up short-term MSFT options at a relative discount

Microsoft stock could bounce after hitting its 40-day moving average

The shares of Dow stock Microsoft Corporation (NASDAQ:MSFT) touched an all-time high of $69.71 on May 2, but have since edged lower amid recent broad-market weakness and a Windows-targeted ransomware attack. However, MSFT stock's pullback could present a buying opportunity for eagle-eyed options traders, if recent history is any guide. Below, we'll discuss why Microsoft stock could be on the verge of another big breakout.

MSFT recently moved within one standard deviation of its 40-day moving average, after being atop the trendline 60% of the time over the past two months -- what we'll call a "signal." According to Schaeffer's Senior Quantitative Analyst Rocky White, the last eight signals of this kind resulted in a solid month for Microsoft shares. Specifically, MSFT stock was higher 75% of the time one month after a signal, with an average return of 2%.

microsoft msft stock chart


However, despite its year-over-year gain of 35% -- MSFT was last seen just a hair under $68 -- the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.11 is higher than 93% of all other readings from the past year. In other words, near-term options traders are much more put-heavy than usual on MSFT stock right now. An unwinding of pessimism in the options pits could add fuel to Microsoft's fire.

And now is an opportune time for premium buyers to strike while the iron is hot. MSFT's Schaeffer's Volatility Index (SVI) of 17% is in just the 20th percentile of its annual range, suggesting Microsoft Corporation's short-term options are attractively priced right now, from a historical volatility perspective.
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