MSFT, NOV, GOOG Options — Unusual Trading Activity — July 20, 2012

| July 20, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in Microsoft (MSFT), National Oilwell Varco (NOV), and Google (GOOG).

As many of you know, unusual options volume can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.

This is something professional options traders pay a lot of attention to, and for good reason…

Unusual options activity can “tip off” big moves in a stock, either up or down.

So let’s take a look at some ‘interesting’ activity that caught our eye this week:

Microsoft Options (MSFT)

Options in mega software company Microsoft (MSFT) are starting to light up the options radar in a big way.

It seems “Mr. Softy” is drawing a lot of positive attention from investors on its upcoming earnings announcement this Thursday after the close. 

In fact, options activity in MSFT over the last week has been about 5 times more than average.

What’s going on?

Despite reporting great earnings in April, the software giant’s stock has been stuck in a tight trading range between $31 and $28.50 a share over the last few months.

But now it seems option traders clearly think it’s going to break above this range.  And they’re ready to take advantage of the situation.

Monday before the closing bell, our tracking system picked up a block trade of 12,000 MSFT July $29 strike call options.  They traded at an average price of only $0.71 a piece.

This is what I call a sound, calculated bet. 

You see, there’s less than a week until expiration and the option is already in the money.  In my opinion, the probability of this trade returning a profit is close to 60%. 

But why be so bullish on MSFT?

As I’m sure you know, Microsoft develops the Windows PC operating system, the Office suite of productivity software, and enterprise server products.

The Windows PC and Office franchises collectively account for nearly 60% of the firm’s revenue.  The server and tools business contributes 24%.

And the rest comes from the firm’s other businesses, including the Xbox 360 video game console, Bing Internet search, business software, and software for mobile devices.

No question about it, Microsoft remains a force to be reckoned with in the software space.

But here’s why traders are loading up on MSFT call options today…

As I said earlier, they’re trying to take advantage of Microsoft shares trading on the bottom of their trading range.  They obviously believe a positive earnings announcement will act as a fast upside catalyst for the shares.

And don’t forget, the software giant has a couple aces up its sleeve. 

First off, Microsoft’s Azure platform is poised to develop into a larger business than their historical cash cows… such as Vista and Office.  Azure is the company’s revolutionary cloud computing platform.

Also, Microsoft’s partnership with Nokia (NOK) should drive large market share gains for the Windows Phone platform.  In fact, the venture should create the next $1 billion-plus annual revenue stream for the company.

Bottom line… MSFT has a lot going for them.  And I believe this large call position is a very smart play.

National Oilwell Varco Options (NOV)

Options in oil and gas drilling equipment supplier National Oilwell Varco (NOV) experienced a large amount of unusual trading activity right at the end of the day Tuesday.

We’ve finally got a little market rally going.  And the oil sector is showing some strength amidst overall market strength as well as activity overseas.

But not every oil and gas company is in rally mode.

As you may already know, National Oilwell Varco has been beaten down over the last five months.  Since hitting a 52-week high of $87.72 in February, NOV has dropped more than 20%. 

And the stock remains down even as the broad market rallies. 

This is important to note.  You see, experienced option traders look at these technicals in order to come up with their trades.

In this case, a single put trader dominated the option activity in NOV Tuesday.  Apparently, he wasn’t concerned about a stock market rally driving the stock higher.

With NOV trading at $68.15 per share, the trader swooped in and purchased 5,500 NOV August $62.50 put options.  In doing so, he paid a total of $561,000 to control the equivalent of 55,000 shares of NOV.

Remember, put buying is a bearish trade where an option trader needs the stock to fall below the strike price by expiration.  As long as this occurs, the trader has unlimited upside on his trade.

And that’s exactly what this trader’s expecting.  As long as NOV continues its downtrend by August expiration, he’ll walk home with a very large profit.

So, what does NOV do exactly?

National Oilwell Varco is one of the largest equipment suppliers in the oil drilling industry.  They provide a comprehensive line of equipment for rigs and consumable products used in oil and gas production.  The company also provides distribution services, which include maintenance, spare parts, and repair services for its oil and gas equipment.

Sound like a great company… but why buy puts on NOV?

Many drillers are choosing to upgrade their existing rather than buying new equipment right now.  Upgrades on offshore oil rigs can add as many as 20 years of useful life.  And this does not bode well for NOV.

In addition, this uncertain market has US drilling activity extremely volatile.  This will make customers reluctant to spend money on brand new land rigs.

And any sustained decline in drilling activity could mean a sharp drop-off in new land rig orders as well as order cancellations.  Of course, this will affect NOV’s revenue quite a bit.

Finally, there is about $6.2 billion worth of goodwill on NOV’s balance sheet.

If management overpays for new and existing deals, they could be forced to take large write-downs. This would certainly have an impact on the company’s financials.

For all of these reasons and more… I think this trader knows NOV is in trouble and poised lower.  

And as a result, he’ll be rewarded handsomely!

Google Options (GOOG)

Options in the multi-billion dollar internet search company Google (GOOG) showed heavy activity Thursday.  

However, this is to be expected as traders patiently await the news…

That’s right, Google reports second quarter earnings after the close of trading today. 

So, how are option traders setting up for this event?

Traders consider this report important because they know it’s going have a profound impact on the remaining big cap tech stocks due to report over the next few weeks.

Our tracking system indicates the premium built into the GOOG options suggests a $32 a share swing in either direction. That would be a 5.5% move for Google.

As I write, Google is trading at $593.02 a share.  And option traders are starting to pile into call options.

Right after the open today, one trader initiated a $590-$600 call spread in GOOG.  This is obviously his way of trading for a move higher. 

Remember, a call spread is an option strategy where one call option is purchased and another option is sold at a higher strike price.  This is done to reduce the cost of the options, as well as to limit the trader’s risk.

You see, with a spread, an option trader can’t lose more than the difference in the strikes minus the amount paid for the position.

Getting back to the trade…

The trader came in buying the July $590 call options and selling the $600 call options.  He made this trade 1,700 times at $4.00 a share.  The total cash outlay was $680,000.

Now, all this trader needs Google to do is trade above $600 a share by tomorrow’s expiration. 

If this occurs, he’d better have big pockets!  He’ll not only recover his initial $680,000 investment, but he’ll also make an additional $1,020,000 profit.

The question now is will GOOG outperform once again?

As most of you know, Google is a technology company.  It maintains web sites and other online content for users, advertisers, and Google network members.

With Google providing so many services, option traders think this company is poised to move higher.  Let’s not forget, before the infamous 2008 market crash, Google was trading at $740 per share.

And it could easily see this price again soon. 

In other words, GOOG is currently undervalued according to most analysts. 

What’s even better, Google’s water faucet of cash is allowing them to focus on providing new and significant opportunities for growth.

Finally, Google’s rise in the smart phone market share through the Android platform is helping to extend their advantage in the mobile world.

I believe option traders who think Google is going higher will be rewarded very soon.

More Options Ideas…

That wraps up this week’s unusual options trading and volume…

Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.

We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!

So keep an eye on your email inbox… we have a lot more options trading ideas coming your way!

Safe Trading,

Marcus Haber

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.