Friday Options Update: MSFT, BAC, MIR, OSTK, GILD, BRL, MAT

July 18, 2008

Rebecca Engmann Darst contributed to this report.

Microsoft (MSFT) – Heading into Microsoft’s earnings yesterday, we were mindful that long volatility positions hadn’t paid off particularly well for Microsoft traders. While January options had priced in nearly an 8% move, the actual move fell short of 1%. Again in April we saw option traders looking for a 6.6% move and only got about 5.9%. Traders were pricing in about a 5% move heading into the numbers this week and the implied volatility reading on all Microsoft options actually fell below the historic reading on the stock prior to the report – a very unusual setup ahead of earnings. So with today’s 7.7% decline to $25.40 it’s clear that it paid to go against the grain and long of volatility – and that downside disparity in implied volatility, coupled with the low time value of the July options ahead of the release – likely made it cheap for contrarian bets. Today’s heaviest volume is in July 25 and 36-strike calls, which have lost about 98% of their value overnight Earnings misses by Microsoft and its search-rival and Nasdaq cohort Google sent Nasdaq Volatility as reflected in the VXN 1.4% higher at 30.31.

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