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Microsoft Corporation Message Board

  • goldteck goldteck Apr 11, 2000 8:59 AM Flag

    Where to now for Microsoft?

    Tuesday, April 11, 2000
    Where to now for
    Covered writing is beginning to look more
    attractiveRichard CroftNational Post
    If you own Microsoft
    Corp., you find yourself about where you were six months
    ago when first reading Judge Penfield Jackson's
    finding of fact that laid the groundwork for the
    negotiations that ended abruptly last week.
    continue to stare at a worst-case scenario, summed up six
    months ago by Connecticut attorney-general Richard
    Blumenthal, who said that if the U.S. pursued the case to
    what he saw as its logical conclusion -- that
    Microsoft was a monopoly and abused its monopoly power --
    consumers and other businesses "would be able to pursue
    remedies on their own." No one would have to prove that
    Microsoft was a monopoly; companies and individuals suing
    Microsoft would have to prove only that they were injured
    because Microsoft used its monopoly power.

    question now is, where do we go from here? The obvious
    next step is quarterly earnings, where Microsoft has
    traditionally excelled. Strong numbers, well above
    expectations, could brace the stock against any further fallout
    from the antitrust case.

    How do option traders
    play this? First, if you own Microsoft stock
    (MSFT/NASDAQ), covered writing begins to look more attractive,
    if for no other reason than to smooth the ups and
    downs in the stock price over the next six months to a

    It is unlikely that traders will bid up
    the stock price, with so much uncertainty overhanging
    the stock. More likely we will see a prolonged
    trading range somewhere between $80 and $120 (all in U.S.
    dollars) a share, much like we have seen over the past

    Most analysts think most of the damage
    has already been done. The stock moved higher last
    Friday as the market appeared to be shifting gears,
    looking forward to the earnings rather than back on the

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • The decline in the stock also drove Microsoft
      options higher. Currently, Microsoft options are trading
      with a 50% implied volatility, up from the longer-term
      average of 40%.
      To put this in perspective, with
      Microsoft at $89 a share, the Microsoft May 90 puts were
      trading at $6.50 a share. The Microsoft January, 2001, 90
      puts were trading at $12 a share. If you sell the May
      90 put, you are obligated to buy Microsoft at $90 a
      share. Accounting for the $6.50 per share premium you
      would receive, your net cost for the stock would be
      $83.50 a share ($90 less $6.50 equals $83.50).

      Microsoft is expected to earn $2 per share over the next
      fiscal year. At $83.50 a share, you are buying a
      blue-chip technology company at less than 42 times
      earnings. With the Microsoft January, 2001, 90 put, the
      cost if you were assigned would be $78 a share ($90
      less $12 per share premium equals $78 a share net
      cost). That's 39 times next year's earnings. What about
      the other players? Obviously, what's bad for
      Microsoft should be positive for companies harmed by
      Microsoft's abuse of power. It could mean payoffs for such
      companies as America Online, which now owns Netscape.
      International Business Machine's OS operating system and the
      loss of market share for Lotus would be legitimate
      beefs. Was Sun Microsystems injured in its attempt to
      develop java-based applications? As for Oracle, this
      vindicates CEO Lawrence Ellison slamming Microsoft's tactics
      every time he was at a microphone. (Although most
      recently, Microsoft and Oracle have teamed up to provide
      software solutions for business-to-business e-commerce.)
      If you want a smaller company that has felt the
      pinch of Microsoft's dominance, take a look at
      Ottawa-based Corel Corp. (COR/TSE). Until Microsoft launched
      its company killer integrated Office Suite, which
      boldly went where no other product had gone before,
      Corel was the dominant player in word processing.

      Of course, Corel is now betting its future on Linux.
      While I don't like the company's chances in the Linux
      space, it does have a reasonable civil case should it
      decide to go after Microsoft. After hitting $64.65
      (Cdn), Corel has come off and is trading around $14.50
      (Cdn). However, Corel options are even more interesting.
      They are currently trading at 115% implied volatility.

      Buying Corel shares and writing slightly
      out-of-the-money covered calls may be an interesting strategy. If
      you can buy the stock at, say, $15 (Cdn), try writing
      the July 17.50 calls at $3 (Cdn) or higher --
      assuming, of course, you like the prospects for the civil

      • 1 Reply to goldteck
      • I've read thru judge's decision. The only company
        that I can see that has a basis for a lawsuit is
        Netscape for Microsoft's (to quote the judge) "albeit
        unsuccsessful" attempt to dominate the browser

        Sun may have a weak case at best.

        I just don't
        see where the judge has left MSFT open to a great
        deal of civil action.

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