Thursday, October 20, 2016

MSFT Analysis

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

[MSFT in Wikipedia]


I shall use the DEC series of options, which trades for the last time 57 days hence, on Dec. 16.

Implied volatility stands at 31%, which is 2.1 times the VIX, a measure of volatility of the S&P 500 index. MSFT’s volatility stands in the 56th percentile of its annual range. The price used for analysis was $57.04.

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

The Trade

MSFT has been on the rising since 2009. The most recent wave to the upside began June 24 in what appears to be the peak of a wave within a larger sideways correction.

Price Action Breakdown
by Laurentiu Damir

Zacks Investment Research gives MSFT a neutral rank with no indication of a analyst adjustments in anticipation of an earnings surprise.

Brokerages in aggregate give MSFT  a 33% enthusiasm index, with 63% of 24 analysts issuing strong buy recommendations.

MSFT's price has risen immediately after three of the last four earnings announcements.

Although the chart shows MSFT at the top of the sideways correction, there's no reason in Elliott wave analysis to foreclose a post-announcement rise. Given the positive analyst assessment, I'm inclined to go with a bullish directional structure for the trade.

Bull put spread, short the $55 puts and long the $52.50 puts,
sold for a credit and expiring 
Dec. 17.
Probability of expiring out-of-the-money

The premium is $0.61, 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 X below the entry price. The biggest immediate move after each of the past four earnings announcements was $4.84, and the average was $3.88. After eliminating the maximum and minimum post-earnings movements, the central tendency is $3.94.

Decision for My Account

The risk/reward ratio is slightly too high to meet my standards. Using my reference $500 trade size, my rules require that I have maximum potential earnings of at least $200. The best I can do with MSFT, given that sizing, is $180.

I'm passing on MSFT. No trade.

-- Tim Bovee, Portland, Oregon, Oct. 20, 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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