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Unusual options activity today in Microsoft (MSFT) call options today has increased as seen in a Barchart Unusual Stock Options Report. This indicates investors have a bullish view on MSFT stock, especially after its stellar Q1 results.
In fact, Microsoft beat earnings and revenue expectations with its Q1 earnings release on April 25. For example, earnings per share (EPS) came in at $2.45, which was 22 cents higher or 9.9% higher than analysts had forecast, according to Seeking Alpha.
Good FCF Numbers
Moreover, free cash flow (FCF), although 11% lower than last year, was still strong at $17.8 billion for the quarter. After deducting a one-time tax payment it is down just 5% YoY, according to Amy Hood, CFO, on the conference call. That is well within its typical variance and shows that the company can easily afford its dividends and buybacks.
In fact, the company spent $4.6 billion on share buybacks and $5.1 billion on dividends during the quarter or $9.7 billion total. That is just over half of its FCF level of $17.8 billion (55%), and shows that Microsoft has plenty of room to both increase its dividend and its share repurchase program.
For example, Microsoft pays out dividends of 68 cents per quarter or $2.72 annually, which is less than 29% of analysts' forecasts of $9.60 in EPS for this year. Since this is the third quarterly dividend at this level, investors can expect a dividend hike after the next dividend payment. This is because Microsoft has raised its dividend per share each year for the past 18 years.
The bottom line is that Microsoft stock will likely benefit from FCF growth, dividend hikes, and its share buybacks over the next year. That is likely why there has been large unusual activity in MSFT stock options.
Unusual Call Options Activity
Today, the Barchart Unusual Stock Options Activity Report shows that 1,075 call options that expire on May 19 traded at the $317.50 strike price, which is just 2.1% over today's price $310.84 per MSFT share.
This call option activity traded for 84 cents per call option. This level of activity is unusual since the volume of 1,075 contracts is over 3.3x the existing open interest (number of contracts outstanding). In other words, investors are attracted to these call options, likely indicating an initiating trade on the bullish side.
In other words, the investor who bought these call options expects that MSFT stock will likely rise above $318.84 per share (i.e., $317.50+$0.84) on or before May 19. That is just a 2.4% gain that the stock needs to have before the long-call investor has a profit.
For example, if the investor believes that MSFT stock will reach $325 on or before May 19, or just 4.55% higher than today, the intrinsic value of the call options will rise to $7.50 by then (i.e., $325-$317.50 strike price). That represents a potential profit of $6.66 ($7.50-$0.84) for the long-call investor, or 8x their original cost.
Shorting Puts and Calls with MSFT Stock
Moreover, even covered call investors have a good deal here. If they own at least 100 shares they can sell a $317.50 strike price call contract and receive 84 cents. That produces a covered call yield of 0.27% for just a two weeks investment period. That annualized out to a 6.76% rate if the investor can repeat this trade 25 times over the next year.
The positive outlook for MSFT stock from its recent earnings report is likely a major reason why this call option is so popular with investors.
Moreover, for investors with a slightly longer time period, shorting cash-secured puts for the June 9, 2023, can provide good income opportunities. As can be seen in the chain below, the $290 strike price puts trade for $1.84 per contract.
That means that the investor who secures $29,000 with a brokerage firm can then enter an order to “Sell to Open” one put contract at the $290 strike price for expiration on June 9. As a result, their account will immediately receive $184. That represents a yield of 0.634% (i.e., 184/$29,000), and on an annualized basis 7.61%.
In other words, there are good ways to make money in MSFT stock, including going long near-term calls, shorting out-of-the-money covered calls, and shorting cash-secured puts that are also out-of-the-money.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
