Thursday, January 25, 2007

MSFT Earnings Play

I thought that I might point out that MSFT's Feb ATM call/put IV levels of 27.50%-29% are at almost 52 week highs (see IV chart below).

So I'm thinking of playing this earnings after the close today by selling the FEB 32.50 Puts for about 1.80-1.85 and buying the FEB 30 Puts for .40-.45 for a net credit of 1.40-1.45 if possible.

That is still anticipating a bullish directional move which of course takes on its own risk. The reward to risk ratio is not great but it's not too bad with about 1.3-1.4/1. Again, I'm anticipating some premium decline as IV drops and the underlying to move higher after the anticipated earnings event.

If I wanted to hedge the directional play, I could also sell the FEB 30 Calls and buy the FEB 32.50 Calls for a net credit of 1.05-1.10 which would offset some of the short put spread premium increases. However, I'll stick with the one sided short put spread (aka bull put vertical spread).

The analyst consensus for MSFT's Q4 earnings is .23 with a low of .14 and a high of .25. The revenue estimate consensus is 12.07 B with a low of 11.72B and a high of 12.43B.

But what will be of course the most sought after information will be the forward revenue guidance based on estimated VISTA sales on the retail side after the Jan 31 product launch.

The next question also for all tech and market investors is will this outlook from MSFT's management provide the catalyst for the Nasdaq and the major indices to new highs again and more importantly, be a platform for a new uptrend level (technically speaking) or,

will it be a lackluster reaction much like today's reaction to EBAY and QCOM's earnings?

In my opinion that seems to be a lot of pressure for one company's performance to take on for the upside.

Warning: The following comments have no scientific, objective or empirical grounds other than a more of a sort of behavioral, subjective, and instinctual/sentimental perspective. In other words, just a few thoughts from the "gut".

But in a market environment where the bulls don't seem to be completely ready to take full profits and the bears are not quite sure whether to increase their short positions, I'd lean in favor of the bulls. It's a difficult task to pick both tops and bottoms; trust me, i've tried many times with few successes and more failures,

I think that given that the uptrend is still intact with the S&P and the DOW, the bears are a little more nervous than the bulls since selling lately has been met with heavy discount buying.

Alright, enough of my babbling. Let's hear some of your babble on this earnings play whether it might just be a non-event or a major event that many institutions are keeping a close eye on.


Anonymous said...

wow! good call on MSFT. This was my first bull put spread. MSFT up to 31.40 in AH.

Terence said...

Thanks. We'll see if it has legs tomorrow. I'm still a little shell shocked by today's action. It will be interesting to see how the market reacts and how IV levels perform as well. I'm glad you were game with me.