Thursday, January 28, 2016

MSFT Analysis

The software/hardware company Microsoft Corp. (MSFT),  headquartered in Redmond, Washington, publishes earnings on Thursday after the closing bell.

[MSFT in Wikipedia]


I shall use the MAR series of options, which trades for the last time 50 days hence, on March 18.


Implied volatility stands at 38%, which is 1.7 times the VIX, a measure of volatility of the S&P 500 index. MSFT’s volatility stands in the 76th percentile of its most recent range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

MSFT has been in an uptrend since April 2009, with the most recent leg to the upside beginning from the China Panic low on Aug. 24, 2015. It has retreated somewhat sharply from a high of Dec. 30, 2015 but remains above recent support.

Two out of the last four earnings announcements have been followed by a higher close to the next trading session.

Changes in analyst expectations suggest the likelihood of an upside earnings surprise, based on methodology developed by Zacks Investment Research that has a 70% chance of being accurate. Brokers in aggregate give MSFT a 33% enthusiasm index, with 57% of 21 analysts issuing strong buy recommendations.

Based on the evidence, I shall structure the position as a bull put options spread.

Bull put spread, short the $50 puts and long the $45 puts,
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money


The premium is $1.20, which is 24% of the width of the position’s wings.

The risk/reward ratio is 3.2:1.

The zone of profit in the proposed trade covers a $1.70 move below the strike price and has no boundary above the strike. The biggest immediate move after each of the past four earnings announcements was $484, and the average was $2.57. After eliminating the maximum and minimum post-earnings movements, the core tendency is $2.28.

Decision for My Account

Although a 3.2:1 risk/reward ratio is acceptable, it is high for a vertical spread. The grid structure requires me to accept more risk than I'm willing to do. For that reason, I am passing on MSFT. No trade.

-- Tim Bovee, Portland, Oregon, Jan. 28, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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