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Is a Pullback In the Cards for Microsoft?

MSFT bears bought weekly puts

by 11/6/2012 9:19 AM
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The shares of Microsoft Corporation (NASDAQ:MSFT - 29.63) extended their recent rebound yesterday, but are now facing potential resistance at their formerly supportive 50-week moving average. Against this backdrop, it looks like some options speculators are expecting the Windows creator to take a turn for the worse by the end of the week.

During the course of the session, MSFT saw roughly 59,000 puts change hands, compared to just about 50,000 calls. A healthy portion of the volume transpired at the weekly 28.50-strike put, which saw more than 10,200 contracts traded -- mostly at the ask price, suggesting they were bought. Plus, put open interest at the soon-to-expire strike skyrocketed by nearly 8,700 contracts overnight, confirming our suspicions of buy-to-open activity.

By purchasing the puts to open, the buyers are expecting MSFT to retreat beneath the $28.50 level by the end of the week, when the options expire. More specifically, the puts traded for a volume-weighted average price (VWAP) of $0.05, meaning the buyers will profit if MSFT breaches the $28.45 level (strike minus average premium paid) by Friday's close. However, even if MSFT remains north of the strike, the most the buyers can lose is the initial premium paid for the puts.

Widening our sentiment scope, we find that yesterday's appetite for pessimistic positions runs counter to the growing trend. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day call/put volume ratio of 2.52, indicating that traders have bought to open more than two MSFT calls for every put during the past two weeks. What's more, this ratio ranks in the 75th percentile of its annual range, suggesting option buyers are picking up bullish bets over bearish at an accelerated clip.

As alluded to earlier, the shares of MSFT have tacked on 3.8% so far this month, outperforming the broader S&P 500 Index (SPX) by two percentage points during the past 20 sessions. However, the equity is facing its aforementioned 50-week trendline, which acted as a foothold from mid-May to mid-October, before switching roles to act as resistance.

Weekly Chart of MSFT since December 2011 With 50-Week Moving Average


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