Breaking Down This Huge Bet on Microsoft Corporation (MSFT)

One trader may have initiated a long strangle on Microsoft Corporation (MSFT)

Digital Content Group
Apr 6, 2015 at 10:55 AM
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Microsoft Corporation (NASDAQ:MSFT) is 1% higher this morning at $40.68, following an upgrade to "outperform" from "market perform" at Wells Fargo. Meanwhile, the stock's options are running at a slightly accelerated clip, helped by a pair of huge blocks that crossed the tape earlier.

Diving into the details, a lot of 4,250 January 2016 50-strike calls changed hands near the ask price earlier, as did a matching block of January 2016 40-strike puts. If the positions are opening, the speculator may be initiating a bearishly biased long strangle, expecting MSFT to either topple $50 or breach $40 by January 2016 options expiration. Specifically, based on the net debit of $3.61 per pair of contracts, the lower breakeven is $36.39 (put strike less net debit) -- a new annual low -- and the upper is $53.61 (call strike plus net debit) -- 15-year-high territory.

Currently, MSFT is in the midst of a multi-month pullback. Since topping out at $50.04 in mid-November, the shares have dropped 18.7%. More recently, the tech stock has underperformed the broader S&P 500 Index (SPX) by 14.6 percentage points over the last three months.

Nevertheless, bullish betting has been on the upswing. MSFT's 50-day call/put volume ratio across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 2.35, or just 1 percentage point shy of an annual high. An unwinding of this optimism could spell downside for the shares.

Microsoft Corporation (NASDAQ:MSFT) could also be vulnerable to negative analyst notes. Nearly half of the analysts tracking the stock rate it a "buy" or better, and MSFT's average 12-month price target of $46.97 stands at a 15.5% premium to current trading levels.

 

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