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New Highs Don't Deter Microsoft Corporation (MSFT) Bears

Microsoft Corporation speculators are buying out-of-the-money puts

by 4/2/2014 11:38 AM
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Option Brief: Microsoft Corporation (NASDAQ:MSFT) extended its quest for near-14-year highs this morning, peaking at $41.66 before turning lower to trade at $41.30. However, some speculators are either gambling on or hedging against a short-term slide for the blue chip, as evidenced by early trends in the options pits.

So far today, the most active option is the out-of-the-money April 38 put, with more than 3,800 contracts exchanged. All of the puts traded at the ask price -- primarily in a large sweep around 9:43 a.m. ET -- and implied volatility is 2.5 percentage points higher at the strike. In other words, it appears the puts are being bought to open.

As alluded to earlier, the put buyers have one of two motives: "Vanilla" bears are expecting MSFT to be south of $37.93 (strike minus volume-weighted average price of $0.07) when front-month options expire at the close on Thursday, April 17; "protective" speculators are merely insuring their MSFT shares against a short-term decline below $38, which represents an 8% discount to the stock's current perch. Either way, the most the buyers will forfeit -- assuming MSFT remains atop the strike through the option's lifetime -- is the initial premium paid for the puts.

Whether speculating or hedging, now is a good time to pick up short-term options on MSFT. The stock's Schaeffer's Volatility Index (SVI) of 19% stands higher than just 18% of all other readings from the past year, suggesting the equity's front-month contracts are attractively priced, from a volatility standpoint.

On the charts, MSFT has been a beast, outperforming the broader S&P 500 Index (SPX) by more than 11 percentage points during the past three months. Off the charts, Microsoft Corporation (NASDAQ:MSFT) kicked off its annual Build conference today, and investors are hoping for revelations on Windows 8.1 and Windows 9, and possibly even the rumored Surface Mini tablet.


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