Dow Stock Flashing Buy Signal

MSFT options traders have been picking up puts at an accelerated clip

Patrick Martin
Jan 3, 2019 at 12:01 PM
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Microsoft Corporation (NASDAQ:MSFT) was not exempt from the broad market sell-off last quarter, shedding 11.2%, its worst since March 2015. However, as the saying goes, "new year, new me," and that pullback could be a buying opportunity for the Dow name, if recent history is any indicator.

Specifically, MSFT has retreated to its 320-day moving average, after spending a lengthy time above it. According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been two other times in the last three years Microsoft stock came within one standard deviation of its 320-day moving average after a lengthy stretch above it. The equity went on to average a one-month gain of 6.72%, with both of those returns positive.

At last check, Microsoft stock was down 2.1% to trade at $98.22, just below the round century mark. Another 6.7% rebound from current levels would put the equity back near $105 by month's end. Prior to the broad market sell-off, Microsoft stock had had been carving out a channel of higher highs in 2018, culminating in a record high of $116.18 on Oct. 3. 

Daily Stock Chart MSFT

A capitulation from some of the weaker bearish hands could create tailwinds for the shares. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), MSFT's 10-day put/call volume ratio of 0.66 ranks in the 90th annual percentile. This means that although calls still outnumber puts on an absolute basis, puts have been bought to open over calls at a quicker-than-usual clip in the past two weeks.

For those going that route, premium on short-term MSFT options are pricing in extremely elevated volatility expectations, per its 30-day at-the-money (ATM) implied volatility (IV), which currently sits at 40.5% -- in the 98th annual percentile.


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