A generic image of hands pointing to charts

Trading Tools to Build Your Portfolio: Will Cloud Computing Give Microsoft Corporation an Edge?

A generic image of hands pointing to charts
Shutterstock photo

Microsoft Corporation ( MSFT ) unveiled on Thursday its four-point plan to maintain its position in the business software market. Cloud computing is on the top of this list, with MSFT's Chief Operating Officer Kevin Turner promising that this technology will help the company "lead" the industry.

In fact, MSFT's cloud customers include 13 of the top 20 global telecom firms, the company said, along with 15 of the top 20 global banks and 16 of the top 20 global pharmaceutical companies. By emphasizing cloud software and customer support, Turner boasted, "Some of the biggest companies in the world are choosing Microsoft."

Option players definitely "chose" MSFT on Thursday, as evidenced by the tech stock's appearance in the Schaeffer's Most Active Options filter. Roughly 233,000 contracts changed hands on MSFT on Thursday -- well above the equity's expected daily volume of around 168,000 contracts. Calls comprised the bulk of the volume, with some 188,000 of these bullishly biased options traded.

In fact, Thursday's call-heavy activity is nothing new; in the past two weeks, speculators on the International Securities Exchange (ISE) have bought to open 8.6 calls for every put, a ratio which ranks in the 99th annual percentile. In other words, traders on the ISE have initiated bullish bets on MSFT at a faster pace just 1% of the time during the past year.

In the same bullish vein, MSFT's Schaeffer's put/call open interest ratio (SOIR), which measures put open interest relative to call open interest among options with less than three months until expiration, is perched at 0.46. This ratio ranks in the 13th annual percentile, revealing that short-term option players have rarely shown a greater preference for calls.

On Thursday, traders honed in on the September 28 call, with over 39,000 contracts traded on the session. Roughly 83% of these calls traded at the ask price, revealing they were likely bought, and open interest increased by 31,270 contracts overnight, revealing that fresh bullish positions were added here. In fact, this strike is home to peak call open interest for the September series, with 168,943 contracts in residence.

One strike higher, 16,824 contracts changed hands on the September 29 call -- the majority of which also traded closer to the ask price. Open interest increased by 14,704 contracts overnight, pointing to buy-to-open activity at this strike.

In the front-month series, option players liked the August 27 call, with some 28,000 contracts traded. More than half of these contracts traded at the ask price, and open interest increased substantially overnight, confirming the addition of new positions at this strike. There are now roughly 72,000 contracts in open interest at this strike, which is currently out of the money by one point.

Judging by Thursday's activity, it seems that option players are expecting MSFT to climb gradually over the next two months, surpassing the 27, 28, and even 29 levels. Interestingly enough, analysts are expecting a nice rally from MSFT, too, as the consensus 12-month price target is set at a lofty $34.38 -- 32% above the stock's close of $26.03 on Thursday.

But are expectations too high for MSFT? On the charts, the tech concern's performance hasn't exactly been pretty. The stock has surrendered nearly 15% year-to-date, taking a massive tumble following May's "flash crash." In fact, while MSFT spent the first part of 2010 in the $28-to-$31 neighborhood, the equity has since succumbed to chart congestion in the $26-to-$27 area.

Weekly Chart of MSFT Since January 2010 With 20-Week Moving Average

Additionally, MSFT's 20-week trendline is docked just above the $27 level. MSFT has not closed a week above this moving average since April 30. Going forward, the heavy accumulations of call open interest at the 27, 28, and 29 levels in the August and September series could pose an options-related problem -- making it difficult for the stock to fulfill the bullish expectations bestowed upon it.

Follow Schaeffer's to the San Francisco MoneyShow Aug. 19 - 21, 2010! Click here for details, including a list of scheduled presentations and how to register.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics