Tuesday, August 20, 2013

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

MSFT closed Monday at trading $31.39, down 1.3% with IV30™ down 1.1%. The LIVEVOL® Pro Summary is below.


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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.

This is an elevated vol note oddly in a huge firm that released earnings, saw a large drop, found an equilibrium and now all of a sudden sees higher volatility than it did pre-earnings. Let's start with the one-year Charts Tab, 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 see two phenomena pretty clearly:

(1) Y-O-Y MSFT has risen from $30.74 to now $31.39 - so essentially no move at all.

(2) The last earnings release (the blue "E" icon represents earnings) was not good news. Here's a quick snippet from that release on 7-18-2013:

NEW YORK (AP) -- Microsoft stock took a big hit on Friday, after the software giant behind Windows, the Xbox and Surface tablets reported disappointing results for the latest quarter.

The results, which fell below Wall Street's expectations, included a large write-off for Microsoft Corp.'s Surface RT business. A poor reception for Windows 8 contributed to a revenue drop in the company's operating system software unit.

Microsoft "struggled far more than we had expected," said Cowen & Co. analyst Gregg Moskowitz, who downgraded the company's stock to "Neutral" from "Buy," and cut his price target to $33 from $38,

The analyst said in a note to investors that he is "much less confident" that the company can deliver healthy growth in the near future due to the magnitude of the Windows decline, the challenges for Surface, pressure on profit margins and the company's reorganization plans.

Source: AP via Yahoo! Finance, Microsoft shares tumble after weak 4th-qtr results

Like I wrote, not good news... but this is a vol note, so let's turn to the one-year IV30™ chart below in isolation.

I've circled both the level of the implied right on earnings (~21%) and the level today. 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. Oddly, the stock has stayed still as it closed at $31.40 the day after earnings and is literally $0.01 lower on Monday's close. So... we have ripping volatility and no stock movement at all.

Finally, let's turn to the Options Tab.

Across the top we can see that Sep vol is priced to 26.53% while Oct is priced to 24.61% and Nov is priced to 25.40%. So for all of those expiries, we're seeing quite elevated levels. So the question is, what's going on with Microsoft? Whatever the answer, the volatility seems to be reflecting the reality that MSFT stock price is not in equilibrium, regardless of the non-existent move since the earnings drop.

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