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.

AAPL Update

Well the announcement made headline news and it's official Apple Unveils Long-Awaited Phone, TV Box.

The iPhone and Apple TV products will be available soon.

What does mean for the credit spread. Well I tried to enter my 90/85 Put Spread at $3.00 but did not get filled after I modified the order to $3.10 when the stock dropped quickly before the news. So instead I waited and got filled at $2.20. Not at all a great entry price and does not provide a great risk/reward but nonetheless I'm in and the current net debit is 1.65 (up .55 +25%).

Now the stock is above 90 and IV has moved to 58/55 respectively.

I'll keep everyone updated about the management of the trade and any other thoughts.

More AAPL To Bite?

Just by way of information. I have to add that one caveat to the explosive implied volatility levels for AAPL is that the Q1 2007 earnings report is scheduled to be released 1/17 which is two days before January expiration.

If most investors are betting that Q1 earnings will be great then IV will continue to rise up to that date most likely. So that still bodes well for our credit play which should see some premium degradation with the expected rise in the stock price up to earnings even with a contiuned rise in IV.

Additionally, if one does not want to play the earnings and there is sufficient profits in the position then it would make sense to close that position prior to 1/17. If you hold and the earnings report is better than expected then one could get an incredible IV drop immediately after that report regardless of the outcome.

Just more food-I mean-apple for thought.

Follow Up On NYX

What can I say about NYX? The stock closed above 105 today (+10 from 1/4's closing stock price).

Those JUN 07 95 Calls that I posted about on 1/4/07 closed today at 18.70 (up 66% from 1/4's closing price). Now ask me if I got in? No. I now have to wait patiently for a pullback to get in which most likely will be tomorrow or the next.

So stay tuned because I now have to look at the 100's or even 105 strikes which are all under theoretical value so far.

Anyone else get in before I did? Grab a vine and let me know.

Is There Another Way to Buy AAPL?

With the Consumer Electronic Show (CES) going on this week in Lost Wages-I mean-Las Vegas, all attention is being paid to Apple (Nasdaq: AAPL). All gadget geeks are awaiting the much anticipated iTV and iPhone (see Apple Expected to Launch New Product).

What does this mean to directional bullish option traders? To some it may mean be a buyer of call options or a seller of put options. Now which one should we choose.

Well here's what I'm considering (doesn't mean that you should): Being a bullish credit seller. What the heck does that mean? It means that you can either be a naked seller of puts or you can be a credit spread put seller. They are both bullish plays. But which one is better or less risky?

Here's the skinny: If you are long term bullish on AAPL then, yes, you could indeed buy call options either ITM, ATM, or OTM. It's your choice. But (here comes the big "but" not "butt") the problem is the current Implied Volatility levels of AAPL options especially on the front month Jan 07 calls and puts.

If you like just receiving premium and possibly owning the stock (assuming you have sufficient buying power), then you probably don't and won't mind getting assigned the stock by a put buyer who exercises his/her right to sell AAPL stock if the put option remains ITM (I hope that makes sense to some out there).

Right now, the JAN 07 85s and 80 puts have IV levels in the low 60% levels. So what? Well these are at 52 wk high levels which means that the anticipation of new product intros at the CES have been factored into the option premiums.

I'm still lost, you say. What I'm saying is that once any major announcement concerning Apple's new products or any non-announcement (not likely but probable) will most likely cause a sudden drop in IV which, correspondingly, will or could cause a drop in premium values.

The only way to offset this drop in IV in the premiums is if the underlying stock price moves higher quickly. So if you want to be a longer term call buyer of AAPL then it might make sense to wait until the IV levels regress to the "mean" of annual IV levels.

You might say, "well is there anything we can do to take advantage of this possible IV drop?". And I respond, "yes, indeed. Sell option premium, specifically put premium."

Here's what I'm looking at: Enter a ATM/Slightly ITM Bull Put Credit Spread position. That entails selling the JAN 07 90 puts currently selling for $6.80 (as of 1/5/07 closing price) and simultaneously buying the JAN 07 85 puts currently asking $3.90.

That would give you a net credit of $2.90. That basically means that if AAPL's stock price trades above 90 by January's expiration Friday which is in 12 days from today 1/19/07, one will get to retain the full net credit of $2.90/contract.

The maximum risk of this trade is the difference between the strikes (90/85) and the net credit (2.90) which would be $2.10 in this example (5-2.90). It's not the greatest reward-to-risk ratio but it nevertheless is better than most credit spread r/r ratios (take it from me, I've seen a lot of them).

Now does one have to wait until expiration to achieve full profit? Absolutely not. At any point if the stock makes a move higher say up to $90 by this coming Friday or sooner (AAPL certainly does have fast moving potential), and the IV levels drop, you can buy back the JAN 07 90 Puts at a much lower price than the original sales price and leave the JAN 07 85 Puts alone to either expire worthless (saves you a commission), or, you could close both positions at any point with a smaller net debit amount than your original net credit amount (that's good by the way-sell high and buy low in reverse).

Then at any point after IV has considerably dropped and/or stabilized you can research possible longer term call options to buy.

Alright, I realize for some that might be a lot to swallow so feel free to get further clarification or make any comments by grabbing a vine on the Option Jungle.

The Greeks of Options

Here's a link to another option blogger who has basically done most of the legwork for us about the "moving parts" of options; namely, the greeks (thanks to ODA125 at optionsmadeeasy). I think that anyone who wants to venture into options or who has or is trading options ought to understand the variables that must be factored into option premiums.

This should take some time to review so factor that into your schedule.

Grab a vine and make some comments about any of this if you want.

Does Anyone Else Other Than Me Like NYX?

I could not believe my eyes when I read Morningstar's report on NYX dated 11-21-06. I can email you the actual pdf or you can access it via their website as a premium subscriber (sorry).

They actually priced NYX's fair value at $128.00 which is way above where it is currently trading at around 95.00 today. Trust me. This is extremely uncommon for Mstar to make a higher target price. It, however, does not mean that it will go straight to $128 but I found it interesting.

I know, I know. What are they thinking? Here's what I'm thinking.

Technically, the stock has enjoyed a nice Q4 rally from the mid 70s to 110 but it has now pulled back to the mid 90s. I don't necessarily like the extension of the pullback but I like these levels better than 100.



The options I like for a longer term bullish call play is the JUN 07 95 Calls currently trading for $11.20. According to my option pricing model, fair value for the options is at $13.20. I don't know about you, but I like buying option premiums at a discount.

These contracts currently trade with a .60 delta and IV is mildly rising around 40% just above the 52 wk low levels. That gives a nice opportunity for the IV levels to rise and hence we might be getting some "jungle juiced" premiums.


I'm waiting for a little pullback in the overall markets just to feel better about being a long rider at this stage of the beginning of the year. I'll look for Monday or Tuesday to get into a position. I'll inform you all of my entry price and so forth.

Keep in mind that NYX is a little more volatile than my previous post selections so buyer beware.

Here's what Jim Cramer of thestreet.com and MadMoney host had to say about NYX (if anyone cares) .

Cramer's growth stock for the new year is the NYSE Group. "If you're comfortable taking a few risks to make more and more mad money, NYX is for you," he said. Cramer believes the NYSE will grow, blow away its estimates and "keep flying" because its main objective is to make money. The company is shutting down trading rooms and laying off people, replacing them with faster and cheaper machines.

Cramer said the stock has great revenue growth and a sound cost-cutting strategy, which should save the company millions of dollars. In addition, it has the lowest operating margins of all publicly traded exchanges and "low, beatable estimates," Cramer said.

The only reason NYSE shares are down is because of arbitrage pressure from its pending Euronext acquisition, said Cramer, and that pressure shouldn't last. The NYSE is ready "to conquer the world" and should go to $240 a share, Cramer said.

Grab a vine and let me know what your thoughts are on NYX.