(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Microsoft Corp. (MSFT) options traders are betting the shares rise by nearly 10% by the middle of September. The optimism comes despite the stock's massive gains over the past year, with shares of the stock rising by almost 40%. If Microsoft's stock rises, traders are betting it would take the stock to a record high. (For more, see also: Microsoft Bulls Look for More Big Gains.)
The optimism for the stock comes on the back of strong earnings and revenue forecast for the coming year. Microsoft reported fiscal third-quarter 2018 earnings that easily topped estimates by nearly 12%, while revenue beat by almost 4%.
Options traders are betting that Microsoft rises about 10% to $111.20, using the calls set to expire on September 21, from its price of around $100.90 in late afternoon trading on June 7. The $110 strike price has an open interest of nearly 30,000 call contracts, which trade at a price of roughly $1.20. It means that a buyer of those calls would need to see the shares of Microsoft rise above $111.20 for the options to break even. The dollar value of those options is about $3.5 million, a sizable bet given the time until expiration.
Since the beginning of June, traders have been steadily increasing their bets that the price of Microsoft will continue to rise. The number of $110 open call contracts have increased from around 8,000 to the current 30,000. Additionally, there is sizeable betting taking place in the calls at the $105 strike price, with 31,000 open call contracts. With those calls trading at $2.60 per contract, they have a dollar value of about $7.7 million. (For more, see also: Microsoft Stock Has the Growth Institutions Want.)
The long straddle options strategy suggests shares of the stock rise or fall by about 9% by expiration in September, placing the stock in a trading range between $91.20 and $108.80. But the number of open calls outweighs the puts by a ratio of over 7 to 1, with 15,000 open call contracts to only 2,000 open put contracts. Again, another indication of the bullish sentiment in the stock.
Analysts are looking for earnings to rise by 16% for fiscal 2018 to $3.84 per share, while revenue is seen climbing by 13.3% to $109.5 billion. Additionally, analysts have been upping their outlook for the company since the start of 2018, with earnings for fiscal 2019 climbing by nearly 9% to $4.41 per share, while revenue estimates have climbed by 4.9% to $120.71 billion.
Trader optimism appears to come with good reason, with it all boiling down to a healthy business outlook.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.