The Dow Jones Industrial Average (DJIA) suffered a mild correction last week, but the blue-chip barometer has since shaken off overseas troubles to rally back from support at its 20-week moving average and reclaimed the 13,000 level.
This should be good news for Dow options traders, as it sets a solid technical backdrop just in time for the thick of earnings season. Among those DJIA components joining the earnings parade this week are Microsoft Corp. (NASADQ: MSFT), McDonald’s Corp. (NYSE:MCD) and General Electric Co. (NYSE:GE).
The world’s largest software company is scheduled to slip into the earnings confessional after the close of trading this afternoon. Analysts are expecting Microsoft to post a profit of 58 cents per share, a decline of 5% from the same quarter last year. The whisper number comes in at 60 cents per share. Historically, Microsoft has bested Wall Street’s expectations in two of the prior four reporting periods, with an average upside surprise of nearly 11%.
Speaking of the Street’s outlook, the brokerage community has issued 22 “buys,” 12 “holds,” and just one “sell” rating; a rather bullish outlook for Microsoft. However, there is room for improvement, as the consensus 12-month price target rests at $34 – a premium of only about 9% from Wednesday’s close of $31.14. Any post-earnings price-target increases could be a boon for MSFT.
Options traders, meanwhile, are loading up on puts heading into Microsoft’s quarterly report. Among the front three months of options, roughly 585,000 and about 500,000 puts are currently open, resulting in a put/call open interest ratio of 0.85. According to data from Schaeffer’s Investment Research, this ratio resides above 80% of all those taken in the past year. In laymen’s terms, options traders have rarely been more bearishly aligned toward MSFT in the past year.
While options traders may be tempted to jump on the bearish bandwagon ahead of MSFT’s quarterly report, the overall technical trend may favor call traders. Specifically, MSFT is in the process of rebounding from support at the round-number $30 level, following the rest of the Dow higher.
As such, a May 31 call, which closed Wednesday with an ask price of 81 cents, could be a profitable bet. Traders could also leg into a bull spread and lower their risk by selling a May 33 call. At the close on Wednesday, a May 31/33 bull call spread could have been purchased for 68 cents, placing breakeven at $31.68 – a gain of about 1.6% from yesterday’s close.
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