MSFT – Microsoft Corp. – A bearish risk reversal enacted on Microsoft during afternoon trading indicates one options strategist is taking a long-term pessimistic stance on the stock. The software company’s shares edged 1.65% lower this afternoon to stand at $25.84 as of 2:55 pm (ET). It looks like the investor responsible for the trade sold 7,000 calls at the January 2011 $31 strike for a premium of $0.90 each in order to partially finance the purchase of the same number of puts at the lower January 2011 $20 strike for a premium of $1.19 apiece. The net cost of the spread amounts to $0.29 per contract. Perhaps the investor is long shares of the underlying stock. If this is the case, the trader may be securing downside protection by getting long the puts. Downside protection kicks in if shares of the underlying stock nose-dive and fall 23.7% to breach the average breakeven price of $19.71 ahead of expiration day.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.
Visit: Interactive Brokers