Microsoft's (MSFT) stock experienced a significant rebound on January 25th, following a decline in response to its fiscal second-quarter results. The options market played a significant role in the stock's recovery as key gamma levels came into play early in the trading session. This caused put option holders to capitalize on the stock's drop, contributing to its resurgence.
The shares fell about 4.5% on January 25, following revenue guidance which was slightly lower than analysts' estimates. The stock fell to about $230, a critical gamma level called the Put Wall.
Gamma Levels Provide Support
The Put Wall is the strike price with the most significant negative gamma in the underlying stock. It can also be a place that offers support as put owners can look to start selling their puts that are now in the money. This causes market makers to unwind hedges in the stock by buying and closing out their short hedges. The stock traded as low as $230.90 on January 25, coming within $0.90 of the Put Wall.
Put Selling Helps To Boost The Shares
The SpotGamma HIRO dashboard, which assesses hedging impact by measuring changes in Delta, shows that when the stock opened, positive Deltas were created from put options. This indicates that owners of puts began to sell their options (blue line) once the stock opened and traded lower.
The selling of the puts allowed the market maker to buy back their short hedges in the stock. This helped the stock to rally from around $231 back to the Key Gamma Strike price of $240. The Key Gamma Strike is the price with the most significant total gamma position in an underlying stock. The stock was supported later in the afternoon as call buyers stepped into the market (orange line), helping to hold the equity around the $240 level.
Support May Remain Around $230
As of January 26, $230 remains the Put Wall, and as long as the Put Wall remains at $230 and doesn't move lower, that price will likely continue to be a significant support for the stock moving forward.
In this case, knowing where the gamma levels were the morning of January 25 provided an investor in Microsoft an advantage. The Put Wall helped to identify where the stock could stop falling and find support. Additionally, it could have served as a warning sign to investors had the shares fallen through the Put Wall, indicating the potential for a steeper decline. But in this case, since options traders were eager to monetize their gains in Microsoft following the morning drop, the stock was able to find support, recover from a roughly 4% decline, and finish down just 59 bps.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.