Profiting from Microsoft's Buyback Plan

09/19/2013 8:00 am EST

Focus: OPTIONS

All within a few weeks, this tech giant announced the retirement of its long-time CEO, purchase of Nokia, and a stock buyback plan and dividend boost. Andrew Giovinazzi of OptionPit.com offers a trade idea based on this latest announcement.

A client of ours sent me a stat that said “Only 2 down days in last 14 for SPX leading into the official end of q/e...un-freakin -real!” I have to share that sentiment. While I have not been betting the market is going to go down, I been thinking it would not go up this fast.

I gave up a long time ago trying to figure out why the market does what it does but at this point my guess is...relief. The equity market is possibly quite happy that the Fed will start to exit. I guess we will see. Either way it is a big rally on lots of unknowns.

As we flip from unknowns to knowns, Microsoft (MSFT) just declared a huge dividend increase and a share buy back work 10%+ of the company market value. The stock ended up the day $ .12 higher than Tuesday. As you can see from the implied volatility slice below there was some speculation that might occur. Implied volatility was down across the board Wednesday as the news and call sellers came out.

chart
LivevolX® www.livevol.com
Click to Enlarge

After the new dividend increase MSFT will yield above 3%. Look at a Jan 2014 33 level call. It is pricing out around $1.57. With the new dividend payable in Nov a MSFT buy write does not look too bad with the IV around 23%. You can pick up 5.4% for four-month hold and cover down to the near-term low.

I think the market overall would be hard pressed to crank out another 5% between now and the end of the year. With the short-term a little hairy, it is generally better to go long term for something solid.

The Trade
Buy MSFT stock below $33 and sell the Jan 2014 33 call for 1.57 or better. It is not sexy money but a decent return when you know someone has $40 billion worth to buy.

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

Related Articles on OPTIONS