Microsoft has been in trouble this year, but some traders believe that hot stocks show signs of a slowdown.
The technology giant has soared nearly 23% since January and is one of the best performing Dow components this year. However, according to Dan Nathan of RiskReversal.com, the stock's rebound may lose momentum.
After the fourth-quarter earnings were announced on Thursday, Microsoft's share price is expected to move around 4% in both directions. This is almost twice the historical average.
On Wednesday, the technology company averaged three times the average daily call volume. In a surge in activity, Nathan pointed out that many traders use rolling option strategies to capture the potential benefits of stocks.
He explained in CNBC's “quick money” on Wednesday: “If someone is [Microsoft] for a long time, they will sell the phone for it because the option premium is raised to the proceeds.”
For example, Nathan pointed out that when the stock traded at $105, the seller sold 110 times a week on August 3. This is a bet that Microsoft's share price will rebound by nearly 5% next month, but find an upper limit around $110.
In addition, Nathan highlighted the stock's level of $97.50, which is the “intersection of the one-year uptrend and the breakout level earlier this year” as a potential downside support.
However, CNBC trader Pete Najarian believes that the recent surge in investor optimism about the stock suggests more benefits in the future.
“I think [Microsoft] is 110 faster than people think. It has made this move to 100 [and] stagnant for quite some time,” he explained. “[But] the buying we've seen in the past few weeks is absolutely unbelievable.”
According to Factset analysts, Microsoft's share price hit a record high of $105.95 on Tuesday, with an average buy rating and target price of $113.55.
Microsoft shares fell about $104.71 on Thursday afternoon.
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