How Large Option Traders Are Playing Microsoft As Cloud Business Booms

Microsoft Corporation MSFT shares are up 41.5% in the past year on optimism about the company’s booming Azure cloud services business.

Microsoft's recent earnings report confirmed its cloud business is relatively immune to the economic shutdown, but mixed option trading on Tuesday morning suggests Microsoft may still have some skeptics.

The Microsoft Trades

On Tuesday morning, Benzinga Pro subscribers received 17 option alerts related to unusually large Microsoft option trades. Here are some of the largest:

• At 9:30 a.m. ET, a trader bought 359 Microsoft put options with a $175 strike price expiring on Jan. 15, 2021. The contracts were purchased near the ask price at $18 and represented a $646,200 bearish bet.
• At 9:36 a.m. ET, a trader bought 710 Microsoft call options with a $180 strike price expiring on May 22. The contracts were purchased near the ask price at $5.80 and represented a $411,800 bullish bet.
• At 10:35 a.m. ET, a trader bought 742 Microsoft call options with a $190 strike price expiring on July 17. The contracts were purchased near the ask price at $6.403 and represented a $475,102 bullish bet.
• At 11:57 a.m. ET, a trader sold 3,832 Microsoft put options with a $177.50 strike price expiring on May 15. The contracts were sold at the bid price of $1.861 and represented a $475,102 bullish bet.

Of the 17 total large Microsoft option trades on Tuesday morning, seven were calls were purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish. The remaining 10 trades were calls sold at the near the bid or puts purchases at or near the ask, trades typically seen as bearish.

See Also: How Amazon Web Services Stacked Up Against Microsoft's Azure

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader. Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their large stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large sizes and the timing of the biggest Microsoft option trades, there’s certainly a possibility they represent institutional hedging.

Uncertain Outlook

While there doesn’t seem to be an obvious bearish catalyst for Microsoft in the near term, bearish option traders may simply be betting that without any bullish catalysts, the stock will run out of steam.

On April 29, Microsoft reported fiscal third-quarter revenue and earnings well above consensus analyst expectations and said the coronavirus outbreak had “minimal” impact on revenue. With Microsoft delivering quarter-after-quarter of impressive numbers, the stock’s market cap has pushed near the $1.4 trillion mark.

Wall Street almost universally praised Microsoft’s big quarter, and not a single one of the 34 analysts covering the stock has a Sell rating on the stock. Some option traders may be starting to wonder what else Microsoft can do in the near term to push its $1.4 trillion market cap even higher.

Bullish sentiment among StockTwits messages mentioning Microsoft has rebounded from just 54.2% on March 20 to 85.7% on Tuesday.

Benzinga’s Take

With Wall Street analysts bullish on Microsoft almost across-the-board, bearish option traders may be betting that it will be difficult for the company to continue to outperform sky-high expectations. However, some traders could also be using Microsoft as a hedge against bullish bets on higher-risk tech stocks as well.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.