Old nicknames die hard. When I started in the business, voice trading was the norm. The stereotype of hoarse men (yes, almost exclusively men) shouting at each other was the only way that trades were executed.Though it proved an inefficient way to do business, it was colorful and fun – at least most of the time. One shorthand that traders used was to give nicknames to commonly traded stocks.
“I-Beam” for IBM was one example. Another was “Mister Softee” for Microsoft (MSFT). Those of you who live outside the New York area might not get the reference, though. Mister Softee is a popular brand of soft-serve ice cream trucks whose jingle burrows into one’s brain like a determined earworm. I apologize for a bit of nostalgia before launching into a very modern analysis of the options market’s expectations for this afternoon’s MSFT earnings release.
Heading into earnings, we don’t see the type of euphoria that the options market anticipated for stocks like Netflix (NFLX) and Tesla (TSLA). Options skews, as displayed in the TWS graph below (MSFT -> Time Lapse Skew with October 30th options displayed) are relatively normal. The only oddity appears to be the depression around the 200 level. The market appears to be relatively sanguine about the prospects for a 5% decline.
Source: Trader Workstation
The Probability Lab shows something similar. The options market is implying its highest probability on outcomes in the 205-212 region, which is a slight decline from current levels. That is in line with much of what we have seen throughout earnings season thus far. Companies have generally been matching or beating their estimates, though most have declined slightly anyway. For years we have seen companies getting only moderately rewarded for beating their numbers and punished for missing. That phenomenon is in place this quarter, if not amplified
Source: Trader Workstation
According to Bloomberg Data, MSFT typically moves about 3.5% after its earnings release. The skew graph above shows an implied volatility of about 57, which converts to about 3.5% (using the rule of 16). That seems about right, no?
Despite the importance of MSFT to the tech sector and the markets as a whole, there is not much to be gleaned from the options market’s assessment of its earnings prospects. Quite frankly, it appears that a consensus view is priced in. We shall soon see what Mister Softee delivers this afternoon.
Disclosure: Interactive Brokers
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