Rumor Mill Spurns Call Selling on Microsoft (MSFT)

01/22/2010 12:01 am EST


Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

News was prevalent on Microsoft (MSFT) yesterday as the rumor mills churned with new developments. For one, there was renewed chatter that MSFT could opt to buy Netflix (NFLX). For another, MSFT is rumored to be in discussions with Apple (AAPL) about switching the default search engine on the iPhone from Google (GOOG) to Bing. Meanwhile, investors are preparing for the company’s earnings report, which is due on January 28. Analysts are expecting per-share numbers of 58 cents, but the whisper number is at 61 cents.

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The July 30 call was notably active in the MSFT option pits, as more than 16,000 contracts changed hands on open interest of 9,951. Slightly more than half of this volume translated into new open interest this morning. Around 11:00 am ET, a single block of 11,850 contracts traded for $2.06 per contract, going off between the bid and the ask. Toward the end of the day, MSFT shares were down 60 cents and this call had dropped 41 cents, or more than its delta would suggest. This implies that at least some of the volume was being sold, possibly to open. Sellers of in-the-money calls are likely moderately bearish for the intermediate term.

We also witnessed some call selling at the in-the-money January 2011 27.50 call and the January 2011 30-strike call. About 10,000 of the 30-strike calls were sold for $2.94 in this LEAPS series, while about 6,000 of the 27.50-strike calls were sold for $4.40. The combination of upcoming earnings and MSFT sitting 3% away from its 52-week high may have raised some caution among option investors.

Beth Gaston Moon, senior editor, Options News Network (

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