Anyone Interested In Mr. Softy (MSFT)?

Believe it or not, I am. Who likes paying a toll, so to speak, everytime you use a computer? Probably no one I know does. Who likes investing or trading a company who controls the toll and that toll bascially goes to its bottomline? Probably anyone I know does.
Well, whether you like it or not, Mr. Softy (no, not Mr. Softee) might be for you.

I noticed a blog called 24/7 Wall St posted their opinion on MSFT and I agree with their analysis.

Here's why I also think Microsoft (Nasdaq: MSFT) might be a solid longer term bullish call play:

UPSIDE

1. STRONG 2007 VISTA OS SALES

2. STRONG 2007 OFFICE SALES

3. STRONG 2007 XBOX SALES

4. UNDERVALUED STOCK PRICE: MORNINGSTAR FAIR VALUE PRICE IS $34.00

5. LIVE SEARCH UPGRADES FOR AD REVENUE GROWTH

6. IPTV VIA AT&T AND VERIZON

7. ZUNE UPGRADES

8. LOTS OF CASH ($43 Billion even after paying out a $32 billion special dividend in 2004)

9. WINDOWS HOME SERVER


10. WINDOWS MOBILE UPGRADES

11. SQL SERVER SALES GROWTH ASSOCIATED WITH VISTA OS

DOWNSIDE

1. WEAKER THAN EXPECTED (WTE) VISTA/OFFICE SALES

2. WTE XBOX SALES

3. WTE BUSINESS SOFTWARE SALES

4. WTE GROWTH ON SEARCH AD REVENUE

5. WEB-BASED SOFTWARE/SERVICES COMPETITIVE THREATS (GOOGLE AND YAHOO)

6. MORE REGULATORY AND ANTITRUST ISSES

7. GREATER SOFTWARE PIRACY

8. INTERNET EXPLORER COMPLACENCY VS FIREFOX ETC

9. LINUX & OPEN-SOURCED APPLICATION THREATS TO ENTERPRISE/MOBILE SOFTWARE MARKETS

10. GREATER SPENDING TO DEFEND AGAINST ON DEMAND SOFTWARE SERVICES VIA THE WEB AND APPLE IPHONE, APPLETV, IPOD ETC.

OK. So those are the fundamental pros and cons. What about the technicals and option pricing factors to be considered.

For one, the stock price has clustered around this 29-30 level for quite some time after making a nice move up from the low 20s in Aug 06. Having said that suggests that there is a possible breakout above the 30 level which would provide some nice premium increases in bullish call options.

Now, which options should I choose? Since I want time on my side, I'm looking at the JUL 07 27.50 Calls. These are slightly ITM and therefore cost a little more than the 1 strike OTM's; the 30 calls.

The JUL 07 27.50 Calls are currently trading for $3.40 and the 30 Calls are $1.85. The 30 calls are trading about $0.20 under fair value according the theoretical option pricing model I use and the 27.50's are about $0.10 below fair value.

That's good either way. Which ones would I choose? I like having a little intrinsic value-meaning the amount difference between the actual stock price and the strike price-to have in reserve. But if you prefer to be a little more aggressive than the 30's would not be bad either.

Both have deltas currently of .75/.55 respectively.

Now, let's talk about Implied Volatility (IV). Both call options have IV of 19.4 and 19.9% respectively. These have been rising the past month from lows of 14% but look like they have up to about 32% levels to go before getting too high.

Let's run a scenario on both 27.50/30 calls: The assumptions are that the stock price runs to $34.00 by April 10, 2007, the IV levels rise to 25% and includes a dividend payout of $0.10 per share paid in 2/13/07 and current interest rate of 5.25%.

Current stock price (1/10/07) = $29.53
Current IV = 19.4/19.99%
Current Jul 07 27.50/30 Call Premium = $3.40/$1.85

Upside scenario results:
Premium would be theoretically priced at $7.00 (+105%) /$4.75 (+156%)

Downside scenario results:
If the stock drops to 27.50 and IV drops a couple of percentage points, the premium would drop to about $0.50 (-73%) for the 30 calls and down to about $1.35 (-60%) for the 27.50's.

I'd prefer if MSFT would pullback to about $29.00 before I engage my longer term call play and I'd prefer to see the overall markets pullback some more before so that we can potentially see some new highs again (pull before you push).

Keep in mind that it's earning season again and we might see continued sideways to slightly upside movement in the short term.

If Mr. Softy breaks out above 30 the markets will most likely follow suit or vice a versa.

Any thoughts, comments, dislikes on my strategy, you know what to do. Grab a vine.