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Microsoft Corporation (MSFT) Trader Takes Pre-Earnings Profit

A short strangle unwinds ahead of MSFT's earnings report

by 10/24/2013 12:14 PM
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Option Brief: Microsoft Corporation (NASDAQ:MSFT) is set to report fiscal first-quarter earnings after the market closes today. As that event approaches, option volume is running at nearly three times its typical intraday clip.

Looking more closely, we see that the session's top two trades each consisted of 5,690 contracts at MSFT's November 36 call and 30 put. The strikes crossed at their respective ask prices of $0.17 and $0.14 each, for a total net debit of $0.31 per pair of options. Although implied volatility rose on both transactions -- which would suggest the initiation of a long strangle -- historical data takes us in another direction.

Specifically, on Sept. 19, twin 5,690-lots changed hands at the exact same pair of strikes -- but that time at their bid prices of $0.36 (for the November 36 call) and $0.23 (for the November 30 put). Open interest increased at the positions overnight, as well, which means the blocks were written to open, creating a short strangle. In sum, the lots were sold for a total net credit of $0.59 per pair of options, with the trader expecting minimal movement in the stock price over the ensuing two months. Under those terms, the premium received was the maximum potential profit for the short strangle, and would be realized as long as the underlying was positioned between the two strike prices at the close on Nov. 15. Last month's gamble has paid off. MSFT ended Sept. 19 perched at $33.64, and was last seen hovering at $33.96.

However, with earnings coming up this afternoon, the speculator is likely taking his profits now -- namely, $0.28 per pair of contracts (the $0.59 net credit less the $0.31 net debit) -- rather than waiting another three-plus weeks to see if the current low-volatility environment holds up. This is understandable, too. Most recently, MSFT's fourth-quarter earnings miss in July sent the shares to an 11.4% single-session loss. Later today, analysts are expecting Microsoft Corporation (NASDAQ:MSFT) to post results of 54 cents per share, a penny higher than one year ago.


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