Friday, August 23, 2013

Microsoft (MSFT) - CEO Steps Down; Stock Pops & Volatility Drops... But Someone Knew Ahead of Time. And So Did You.

MSFT is trading $34.40, up 6.2% with IV30™ down 13.1%. The LIVEVOL® Pro Summary is below.

Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers.

The option market priced in this event a week ago. And it appears there was some suspicious trading on 8-7-2013 (many thanks to Doris Frankel for pointing out the order flow). How about that?...

What I see here is evidence of potential improprietous usage of insider information and a fascinating reflection of this risk embedded inside the option market at large. And yes, there may have been rumors about this news, but someone speculated fairly largely to the upside on a stock that had just collapsed off of earnings for just a "rumor."

This is a follow up to the blog I posted on 8-20-2013 (i.e. three days ago). You can read that post by clicking on the title below:

Microsoft (MSFT) - Volatility Explodes, Stock Stays Still After Big Drop on Earnings; This is Not Equilibrium

As the title reads, my main contention three days was simply that the option market reflected extreme volatility in the near-term and that the stock, though it was trading in a tight range after the earnings fallout, was not at equilibrium. It turns out that the contention was correct -- MSFT was not at equilibrium, the stock did move big in the immediate-term and the volatility has now cooled off. The news "seemed" like a surprise, but not to the careful observer.  Here's a news snippet:

The announcement of Microsoft (MSFT) CEO Steve Ballmer’s plans to retire within the next 12 months was just seconds old when shares of the famed software maker took off, up 8% in pre-market trading merely on investor glee that the king was (almost) dead.

In regular early trading, Microsoft shares were up 7% in to $34.68. Since Ballmer owns some 333 million shares, news of his retirement actually boosted his own net worth by about $1 billion.

Source: The Exchange via Yahoo! Finance; Ballmer’s Pending Departure Only Makes His Mistakes More Obvious

For the sake of ease, let's look at the two company summaries from 8-19 and today (8-23) side-by-side, below:



We see the stock is up ~10% and the volatility is down ~15% from three days ago.

If we look at the Options Tab from the close on 8-7-2013, below, we can see that 62,500 Sep 32 calls and 83,200 Sep 33 calls traded on that day, and they were substantially purchases.  As we'll see later in this post, the OI in the Sep 33 calls is now 166,000+ while the OI in the Sep 32 calls is just under 80,000.  The Sep 33 calls were purchased for ~ $0.20 and mid-day today were priced at ~ $2.00.  That would be ~ 1000% in two weeks.

Let's examine this a little closer and turn to the Charts Tab (one-year) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can first see the gap down on 7-19-2013 off of the earnings release from the day earlier (AMC).  But then, as I've highlighted, the stock found a quite period where it literally moved ~$0.35 close-to-close in ~a month time period.  Just stuck.  But not the volatility...

Let's turn to the one IV30™ chart in isolation below.

To quote my prior article:
We can see that even though earnings were quite disappointing, the vol dropped (as it normally does) after earnings. The news was digested, the equity value dipped and all seemed back to normal. But after the implied dipped to 17.4% on 8-2-103, it has since exploded up more than 52%, breaching an annual high on Friday.

Exactly, Ophir, the volatility exploded as the stock was sitting in a quiet period.  We can see that the level reached in the short-term implied was in fact an annual high... And what do you know, one week later, after a month of a frozen equity price, the stock has popped 6% and, note this, the volatility has dropped.  The vol drop reflects that whatever risk was lingering in the stock is now gone -- or in English, the risk was this announcement, and it's now happened.  Remarkable efficiency from the option market.  Remarkably good timing in the August 7th call purchases too.

Finally, let's turn to the Options Tab, below.

Across the top we can see that Sep vol is priced to 22.84% and Oct vol is priced 22.10%, both down substantially on the news today.  As I mentioned at the top, check out that OI in the Sep 32 and Sep 33 calls.  How fortunate for someone...

Well there you go.  MSFT was not in equilibrium, but the option market now reads that it is... at least for the short-term...

This is trade analysis, not a recommendation.

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