By Jud Pyle, CFA, chief investment strategist for the Options News Network
hit the news wires today with plans to open a chain of retail stores, similar to how
has dedicated stores. In the options pits, the big story for MSFT has been the January 2010 series, which has seen selling activity all week.
Looking at the January 2010 22.5 calls, we find that more than 14,000 have traded already today. Now, given that the open interest of these calls is more than 55,000, and given how much volume there is every day in Microsoft, this is not necessarily unusual activity. But what makes it interesting is that it is a continuation of a selling trend. Investors are continuing to sell options in Microsoft, betting that the volatility of the shares will decrease for the next 11 months.
Friday the Jan 22.5 calls are currently trading for around $1.80, with the stock close to $19.25. That is an implied volatility of roughly 41.5. By comparison, the realized volatility of Microsoft shares for the last 63 days is more than 63. And the realized volatility for the last year has been over 50.
Friday's activity comes on the heels of some other activity in the January 2010 options on Wednesday. On that day, more than 28,000 of the 15-22.5 strangles were sold for an average price of around $3.60 with the stock trading at $19.30.
A strangle is when an investor sells (or buys) a put and call simultaneously, but with different strike prices. In this case, the investor sold the 15 put and the 22.5 call simultaneously. That was an implied volatility of 41 in the calls and 53 in the puts.
So why would investors continue to sell options when the premiums they are collecting imply that the stock is going to move so much less than it has been moving? One possible answer is that for today's trade, it is a long shareholder who wants to sell calls because he or she is happy to sell shares for $22.50 (plus the $1.80 they are collecting).
In the case of the strangle, the investor will profit if the stock is above $11.60 and below $26.10 at expiration in a little less than a year. So the investor is taking a view on the type of range that Microsoft might maintain.
Another way this investor might make money, however, is if implied volatility falls. As recently as last July, the realized volatility of Microsoft was closer to 30 than to 40, so this may shed some light on why the options are forecasting a lower realized move for Microsoft.
The willingness of investors to sell Microsoft option premium like this is another example of the increased willingness by some market participants to accept more risk. Accompanied with the decline in Treasuries during the last few weeks and the rally in corporate bonds in the last few months, these data points are indicators of the market becoming more willing to put capital back to work in less-safe assets.
Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."