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The flurry of news refuses to stop for Microsoft Corporation (NASDAQ:MSFT). Not long after acquiring Nokia Corporation's (ADR) (NYSE:NOK) main handset business, the Redmond, Wash.-based company sold its IPTV platform Mediaroom to Ericsson (ADR) (NASDAQ:ERIC). In addition, the company scored a patent win against Google Inc's (NASDAQ:GOOG) Motorola Mobility.
Elsewhere, in MSFT's slower-than-usual options pits, one trader -- perhaps inspired by all the buzz surrounding the software concern -- is hoping for a significant swing over the next seven months or so. Just before 10 a.m. EDT, two 7,000-contract blocks changed hands at the April 32 call and April 29 put, each at their respective ask prices of $1.86 and $1.58. Volume surpassed open interest at both strikes, suggesting the creation of new positions, in what amounts to a long strangle.
In this case, the trader is expecting Microsoft to make a big move, but he's not sure of the direction. The upside breakeven point is $35.44, which is the call strike plus the $3.44 net debit ($1.86 plus $1.58) for each pair of options. Meanwhile, the downside breakeven is $25.56 (put strike less net debit). In other words, from the stock's current perch at $31.39, it would take a gain of 12.9% or a loss of 18.6% before the long-term speculator would start to profit.
A look at MSFT's charts shows that swings of those magnitudes are by no means impossible -- particularly given investors' reactions to recent events. On Aug. 23, the shares gapped upward nearly 9% on the news that CEO Steve Ballmer would be retiring within the next 12 months. In addition, a fiscal fourth-quarter earnings miss in mid-July sent the shares plummeting by 12% within a matter of hours.
No matter what happens, however -- even if the shares remain lodged between the strikes through the duration of the strangle's lifetime -- the most this morning's trader can lose is the initial premium paid.
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