Thursday, April 22, 2010

Microsoft (MSFT) - Earnings Preview

MSFT is trading 31.18 with earnings AMC today. The LIVEVOL™ Pro Summary is below.

The company dipped after the open and vol increased but the trend quickly reversed with a small pop in stock price and a corresponding drop in front month vol that actually put it down on the day. The Tick Chart is included (click to enlarge). Stock on the top, vol on the bottom.

The Options Tab snap (click to enlarge) demonstrates a couple of things:
1) The front month ATM straddle is worth $1.64
2) The front monnth vol (24) is just three points above the second and third months (21).

The Skew Tab snap from today and from the day of earnings in the last cycle (1-28-2010) are included. Note the seven point divergence in front to second month vol in the last cycle relative to the somewhat muted vol diff this time.

MSFT followed a consistent earnings pattern for five consecutive cycles starting with the 7-17-2008 cycle and ending with the 10-23-2009 cycle. Specifically, a straddle sale at the close on the day of earnings and a purchase back the day after was a winner each time. The Earnings & Dividends Tab for those cycles is included with the relevant values highlighted (click to enlarge).

The next two earnings cycles were the opposite. A straddle purchase was a win for the one day holding period. The Earnings & Dividends Tab snap for those cycles is also included (click to enlarge).

Looking more carefully at the earnings cycles we can see a clear patten in vols. Namely, the vols have generally decreased over the last 8 quarters (like the rest of the market). The vol stats per earnings cycle are included (click to enlarge).

The vol average for the five cycles when a sale was a winner was 50. Excluding the 10-23-2008 cycle (when the world was exploding), the average is still 43. The average for the last two cycles was just 34. Today, it's 24.

Keep in mind that May has the longest options cycle possible as the 1st is a Saturday. That makes options worth more ceteris paribus.

This is trade analysis, not a recommendation.

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