There were 512 unusually active call options in Wednesday's trading. I define these call options as those with Vol/OI ratios of 1.24 or greater and expiring in seven days or more.
The Microsoft (MSFT) Feb. 21/2025 $470 call, with a Vol/OI ratio of 84.75, was in the second spot. Its volume was 32,545, which is reasonably high given its 30-day average volume of 252,618.
Somebody was hot to try for Microsoft stock yesterday. At first glance, it seems like a slam-dunk trade. However, there are some things to consider on both sides of the argument.
Here’s my two cents.
How’s Microsoft’s Performance?
Year to date, MSFT stock is up 13.53% through Oct. 24, eight percentage points less than the S&P 500. Compared to the other six stocks in the Magnificent Seven, it has the second-worst, better than only Tesla (TSLA), the only stock in the red on the year.
Note: As I edit this about 70 minutes into trading, TSLA stock is up 17% and into positive territory in 2024.
Over the past year, it has trailed the index by seven percentage points and has performed better than Tesla (-1.33%) and Alphabet (GOOGL) (17.56%).
Lastly, its 5-year and 10-year annualized returns are better than the index, but significantly worse than the average of Mag 7.
Reversion to the mean has come home to roost.
The Opportunity Available at Current Prices
What you’re looking at is Barchart’s Long Call page for the February $470 call. It suggests that the probability of the call being in the money (I.e., the share price trading above $470) is about one in four. So, it's not great.
However, the price is most definitely right. The $10.15 ask is a down payment of just 2.4% on the right to buy 100 Microsoft shares. Anytime this is under 5%, I’m interested.
The big thing hanging over the stock is its earnings, which come out next Wednesday after the close. There are varied thoughts on how good the quarter's results will be.
For example, Seeking Alpha reported comments on Oct. 19 from Piper Sandler analysts that suggested earnings could be mixed because of the changes Microsoft made in August to its segments and metrics.
“‘By our estimate, Azure IaaS revenue is now 20%-plus lower with a 34% growth profile that could moderate to 33-34% this quarter,’ said Piper Sandler analysts, led by Brent Bracelin, in an investor note. ‘Even after tempering Copilot assumptions, we remain bullish on Microsoft AI given triple-digit growth prospects at OpenAI and now see Microsoft AI revenue eclipsing $10B in F2025E (90%+ from Azure),” Seeking Alpha wrote.
As a result, Piper Sandler lowered its target price by $15 to $470. So, it’s anticipated MSFT stock will get to $470 in the next 12 months. The call requires this to happen eight months sooner.
That’s a tough nut to crack.
Another Way of Looking at It
Analysts say it has about 11% appreciation potential over the next year. Given that it has underperformed in the last 12-24 months compared to some of its Mag 7 peers, that’s not very encouraging.
However, analysts traditionally are very late to the party when it comes to raising price targets. If the company reports better-than-anticipated results next Wednesday and what analysts hear in the conference call is also optimistic, you could see some upward revisions to price targets. Although it's doubtful that Piper Sandler will be one of those Wall Street firms to do so, you never know.
Of the 58 analysts covering Microsoft stock, 91% say it’s a Buy. Barron’s contributor Angela Palumbo pointed out on Oct. 18 that Microsoft could be a safer bet than Alphabet in the near term. This could lead to more action on MSFT post-earnings as investors gain confidence that Azure’s growth will accelerate in the second half of the year.
“‘BofA Securities analyst Brad Sills rates Microsoft as a Buy with a $510 price target. He wrote in a research note Thursday that he believes there will be an acceleration of Azure growth in the second half of the year, which would be a positive ‘catalyst for shares,’” Palumbo reported.
BofA Securities is more upbeat than Piper Sandler about the rest of 2025. That said, there’s only one Sell call out of 58, so the downside risk doesn’t appear significant.
A Slam Dunk Bet?
If you are bullish about Microsoft's long-term future and are considering buying its shares, a $1,015 bet using call options isn’t a big deal, given that 100 MSFT shares at yesterday’s closing price would cost you nearly $43,000.
Further, if you sell the call before Feb. 21, you've got a bailout available.
Based on the 0.28829 delta, you can double your money if it appreciates by $35.21 (8.3%) in the next 120 days, and sell the call.
Over the past 52 weeks, MSFT stock has had approximately four moves of 10% or more, most, if not all, achieved within a month.
Is it a slam dunk? As the 23.53% ITM probability points out, the odds are against you. However, you don’t have to get to $470 to make money on this trade.
The risk/reward is excellent.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
