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Morning Update

The major news overnight was that the People's Bank of China injected 365 Yuan ($57.92 billion) into the economy this week in order to stimulate the economy. This booted overnight risk sentiment and has US stocks in positive territory this morning.


Yesterday as MSFT fell for a fourth day in a row we noticed option traders stepping into the market to buy long dated calls. The biggest trades of the day were the purchase of 12,000 Jan. 40 calls for $0.59 and the purchase of 7500 Jan. 27 calls for 4.80. The 40 calls will turn a profit if MSFT is above 40.59 at expiration, a 35% move higher, and the 27 calls will make money if MSFT is above 31.80, a 5% move higher. Yesterday MSFT touched its 200-day moving average, which stopped the stock's decline and acted as support. These option trades show traders are willing to bet that this is a turning point in the stock and that it will see a sharp rally into 2013. Microsoft has several market moving events ahead on its calendar for October: on the 18th it will release earnings and on the 26th it will release the new Windows 8 operating system. We see buying calls into this week's sell-off as a great way to gain exposure to Microsoft's potential upside ahead of a major product release while limiting downside risk and keeping cash outlays to a minimum.

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