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Large Microsoft Option Traders Selling Friday Calls Following Recent Rally

Wayne Duggan

Microsoft Corporation (NASDAQ: MSFT) shares have rallied more than 3% off of last Wednesday’s lows when a yield curve inversion in U.S. Treasuries sparked an 800-point drop in the Dow. However, heavy selling in weekly Microsoft call options on Monday suggests option traders don’t see the momentum continuing in the near-term.

The Trades

On Monday, Benzinga Pro subscribers received 22 option alerts related to unusually large trades of Microsoft options expiring on Friday. Here are a handful of the biggest:

  • At 10:09 a.m., a trader sold 10,058 Microsoft call options with a $142 cent strike price near the bid price of 25 cents. The trade represented an $251,450 bearish near-term bet.
  • Less than a minute later, likely the same trader sold 4,129 Microsoft call options with a $142 strike price near the bid price of 25 cents. The trade represented a $103,225 bearish near-term bet.
  • At 10:47 a.m., a trader sold 1,663 Microsoft call options with a $142 strike price near the bid price of 25 cents. The trade represented an $41,575 bearish near-term bet.
  • At 12:58 p.m., a trader sold 1,789 Microsoft call options with a $142 strike price near the bid price of 25.7 cents. The trade represented an $45,779 bearish near-term bet.

Of the 22 total large Microsoft option trades of contracts expiring on Friday, six calls were purchased at or near the ask, trades typically seen as bullish. The remaining 18 trades were calls sold at the near the bid and puts purchased at the ask, trades typically seen as bearish. Each of the four largest trades of the morning were all calls sold near the bid.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively modest size of the Microsoft option trades by institutional standards, they are unlikely to be professional hedges.

Microsoft Losing Steam?

The large option traders selling calls on Monday may simply be cashing out of their Microsoft positions after buying on last Wednesday’s dip. At the same time, they may be looking to generate some near-term income by selling covered calls, assuming that the market takes a breather in the next few days.

All the calls sold Monday morning were out-of-the-money at strike prices of either $140 or $142, making them potentially compelling opportunities for covered call sellers given the stock would have to rally at least another 1.4% this week to reach the break-even point on the contracts.

Of course, these traders could also be betting on more negative trade war headlines or bearish commentary from the Fed minutes dragging down Microsoft shares this week. The good news for Microsoft investors is that almost all of the large trades in Microsoft options on Monday morning were in Friday contracts, suggesting option traders are not making longer-term bets on the outlook for Microsoft’s business but rather the direction the stock will trade in the near term.

Microsoft's stock traded around $138.20 per share at time of publication. The stock is up 36% year to date.

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