Tech bulls target new highs from software giant
04/25/17

It seems like the bulls just can’t get enough of tech stocks.

The sector has trounced the broader market all year, rallying 11 percent since January while the S&P 500 has gained just 6 percent. There’s been good news virtually all around. Do you like semiconductors? They’re ramping at the quickest pace since 2010.1 Fan of cloud computing? It’s growing fast.2 Remember PC’s? Even they’re coming back from the dead.3

Yesterday options traders targeted Microsoft (NASDAQ: MSFT), a long-time cornerstone of the space. They gobbled up more than 24,000 October 67.50 calls in the first half hour of the session for $3.35 to $3.55. Calls determine where and when investors can buy a stock, arguably sparing them the difficulty of timing a large purchase. (In this case as much as 2.4 million shares.) They can also generate some interesting leverage if the stock moves in the right direction.

Monday’s contracts will double in value if the shares climb 11 percent to $74.40 over the next six months, and triple from a 16 percent gain. They’ll break even around $70.95, and expire worthless if MSFT closes below $67.50. The stock closed up 1.70 percent to $67.53.

MSFT began the session having never traded above $67.50, and was below that level when the trade occurred. That means the buyers saw the potential not only for new highs, but a double-digit advance to significantly higher peaks.

Microsoft (MSFT) 6-month chart

Source: OptionsHouse by E*TRADE

They’re probably also very aware that MSFT shot into record territory following its last earnings report in January,4 and has another set of numbers due this Thursday afternoon. Sure, the stronger PC market has boosted the traditional Windows and Office products (which date back to the 1980s), but some analysts are more excited about offerings from this century: in particular, its Azure cloud-computing platform and the company’s recently added LinkedIn social network.5

There were at least two more interesting things about Monday’s transaction. First, because they expire all the way out in October, the options will be less vulnerable to a near-term drop if earnings aren’t all peaches and cream. Secondly, it made MSFT the third-busiest equity in terms of options volume behind only Bank of America (NYSE: BAC) and Apple (NASDAQ: AAPL). For most of the last month, it was lucky to reach the top 10.

Bottom line: We’re in the thick of earnings season for the tech sector, and yesterday traders positioned for some healthy gains from one of the biggest names in the space.

 

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1. Semiconductor Industry Association: Global Semiconductor Sales Up 16.5 Percent Year-to-Year. 4/3/17.

2. Cloud Tech: Gartner: Public cloud market to reach $246bn in 2017 with IaaS and SaaS at forefront. 2/22/17.

3. IDC: Traditional PC Market Was Up Slightly, Recording Its First Growth In Five Years as HP Recovered the Top Position, According to IDC. 4/11/17.

4. Reuters: Microsoft profit up as demand for cloud service soars. 1/26/17.

5. Bank of America Merrill Lynch: Finally a beat and raise. Reiterate year ahead top pick and $75 PO. 1/27/17. Benzinga.com: Microsoft May Be Poised To Deliver Highest Top-line Growth In 2 Years. 4/20/17.