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Options traders bet on gains for Microsoft, more downside for this sector

Key Points
  • Big options activity in Microsoft and the Indsutrials ETF, according to trader Pete Najarian.
  • 3,100 May 95 strike calls bought in Microsoft for $1.60.
  • 10,000 May 71 strike puts bought in the XLI Industrial Sector SPDR ETF.

Tech remains one of only three S&P 500 sectors to post a positive return for 2018, and options traders are betting on more gains ahead for one name in the space.

Bullish investors purchased more than 3,100 Microsoft calls at the May 95 strike price on Tuesday for roughly $1.60 a contract, according to "Halftime Report" trader Pete Najarian.

Each option contract gives the investor the right, but not the obligation, to buy 100 shares of the underlying company's stock by the contract's expiration date.

These particular call options expire on May 25, so the share price would need to climb above $95 by the end of May in order to be profitable -- plus initial the cost of the option.

Bulls bet on Microsoft. Plus, the sector that might be set to drop

Tuesday's bullish options buying in Microsoft follows prior activity spotted by Investitute's Jon Najarian on Monday.

Options traders bought more than 11,000 May 96 strike price calls for around $1.08, which also expire on the 25th. The price of those calls has since moved more than 35 percent to the upside.

Microsoft reported Q3 earnings and revenue that beat analysts' expectations last week, with sales growing 16% year-over-year – helped by double digit revenue growth from the company's More Personal Computing, Productivity & Business Processes, and Intelligent Cloud divisions.

Microsoft shares have outperformed year-to-date, rising more than 10 percent while the broader S&P 500 Tech Sector (XLK) has managed a near 3 percent gain.

Elsewhere, investors are betting for continued underperformance from another popular area of the market: the industrials.

Pete Najarian highlighted the purchase of more than 10,000 May 71 puts in the XLI – the ETF that tracks the S&P 500 Industrials sector – that expire on May 18th.

The XLI ETF has dropped 10 percent in value over the past 3 months, and the buyer(s) of these put options believe there's more downside ahead.

"There are high valuations across the board in many of these various [industrial] names," Najarian said. "Maybe that is what people are preying on, the idea that maybe this isn't over and there's still a little bit of downside for the industrials."

Pete and Jon Najarian own Microsoft calls. Pete Najarian owns XLI puts.