Wednesday, December 11, 2013

Microsoft (MSFT) - Volatility Explodes to Multi-year Highs, Stock Ripping. Option Market Reads: MSFT Matters Again... I Just Don't Know Why Yet...

MSFT is trading $37.44, down 1.8% with IV30™ up small... again.... The LIVEVOL® Pro Summary is included below.

Provided by Livevol

Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company operates in five segments: Windows & Windows Live Division (Windows Division), Server and Tools, Online Services Division (OSD), Microsoft Business Division (MBD), and Entertainment and Devices Division (EDD).

I last wrote about MSFT on 12-5-2013 (so, a week ago). You can that post by clicking on the title below and I have included the Symbol Summary from that date below as well.

Microsoft (MSFT) - Volatility Ripping; CEO Questions; and Stock Performance that May Surprise You...


Provided by Livevol

On 12-5 and today, I found MSFT for the same reason: IV30™ elevated to multi-year highs.  I have included some snippets from the prior post, and then we can move on to today's action:

This is both a stock and volatility note -- both of which were eye opening to me.

On the stock side we can see MSFT has been ripping over the last two-years, up more than 40% in that time frame.. I do note a nasty gap down off of earnings in the summer (the blue "E" icons represent earnings dates). I also note that the stock was just at multi-year highs.

So how has MSFT performed relative to the market and some other big names? Let's look at a one-year stock chart, below:

SPY: Yellow
GOOG: Green
AAPL: Blue

Provided by Livevol

But, there is also a volatility story here, and it's not trivial. Note that the current level for MSFT is an annual high and right on a multi-year high. For the last two years, the winter earnings release has been on 1-19-2012 and 1-24-2013. The Jan 2013 earnings date followed a release on 10-18-2012. This year MSFT released earnings on 10-24-2013. So, in English, MSFT likely has earnings due out in Jan '14, but the volatility is behaving like earnings are due out any day.

So what's going on? Well, there is a CEO hole that needs to be filled as Steve Ballmer (current MSFT CEO) is stepping down / retiring).

OK, that was the note a week ago.  Ford's CEO decided to stick with Ford (as he had been saying for quite some time), but the option market popped in risk on the actual news (which is odd).  Let's look today.

The MSFT Charts Tab (two-years) is included below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

We can see that MSFT stock is right about where it was from the prior post, a rather remarkable increase in market cap of ~ $100B in two-years, out pacing AAPL and the S&P 500 in returns over that time period.  But there's that pesky volatility again...

Let's turn to the two-year IV30™ chart in isolation, below.

Provided by Livevol

In the last post (12-5-2013) MSFT was near multi-year highs in IV30™.  We are now through that level and MSFT is hitting multi-year highs in the implied right now.  This time though, there is no "surprise CEO news."  this time there is no news at all... or is there?

Why is MSFT trading at multi-year highs in risk as the stock is booming, as the market is booming, as the economy is recovering (?)?.

Ya know... I have no idea... But when we look to the Skew Tab and the Options Tab (below), I see even weirder "stuff."

First, let's turn to the Skew Tab from six months ago, below.

Provided by Livevol

Now, look at the Skew Tab as of today.

Provided by Livevol

What we can see a stark change in the risk reflected by the options. namely, the skew today is parabolic and reflects both downside risk (which is normal) and upside potential (which is not normal). Something is afoot with MSFT.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, let's turn to the Options Tab.

Provided by Livevol

Note how similar the Jan and Feb vols are.  One of them has the earnings release, but why are they both priced so close to each other and at multi-year highs?  What is going on in MSFT?

For now, this can no longer be seen as the forgotten giant that putters around with an old business.  The stock has outperformed the ripping market, the largest firm in the world, and the risk in the option market is at unprecedented levels for the last two-years and the skew has shifted. The option market reads that MSFT matters again... I just don't know why yet...

This is trade analysis, not a recommendation.

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