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Option Brief: Microsoft Corporation (NASDAQ:MSFT) rallied to the $39.90 level yesterday -- its highest mark since July 2000 -- after multiple sources said a version of Microsoft's Office software for Apple Inc.'s (NASDAQ:AAPL) iPad could be rolled out later this month. Against this positive price action, overall option volume jumped to nearly five times typical levels, and a number of short-term speculators targeted a quick breakout above the round-number $40 mark.
The most active strike on Tuesday was MSFT's March 40 call, where 34,868 contracts changed hands -- mostly at the ask price, suggesting buyer-driven activity. Open interest soared overnight, making it safe to assume that new bullish positions were initiated. Amid yesterday's upward momentum, delta for the call jumped to 0.30 (from Monday's close at 0.04), suggesting a 30% chance of an in-the-money finish at Friday's close, which is when the front-month options expire.
Meanwhile, the weekly 3/28 40-strike call also garnered its fair share of attention. More than 28,200 contracts crossed at this slightly further-dated call, including one large lot of 17,706. According to Trade-Alert, the block of calls was purchased for $0.32 apiece, implied volatility rose at the transaction, and open interest jumped overnight -- collectively pointing to buy-to-open activity. Should MSFT stay south of $40 through next Friday's close, the maximum loss is limited to the initial premium paid. For Tuesday's call buyer, this amounts to about $567,000 (17,706 contracts, times net debit, times 100 shares per contract).
As noted, Microsoft Corporation (NASDAQ:MSFT) put in a solid technical performance on Tuesday, and by the close, the stock was sitting 3.9% higher at $39.55. In addition to the well-received fundamental news, the equity received got clocked recently on a Monday to start the day. Overnight, Cowen and Company followed Barclays' lead, and raised its price target for MSFT to $40 from $39.