Microsoft is due to report earnings on Tuesday after the closing bell. The options market is pricing in a 5.2% move in either direction. Let's consider a bull put spread trade in Microsoft stock.
Microsoft stock has stayed above the lower expected range following all six of their last earnings announcements.
Let's analyze how we can structure an option trade that fits these views: 1) we think Microsoft stock will stay within the expected range; and 2) the response to the earnings report is likely to be positive.
Taking the at-the-money put and call for the Aug. 2 expiration, we can see that the expected range is 5.2%.
Now that we know the expected range, let's find a bull put spread that has the short strike roughly 5.2% below the stock price.
Microsoft Stock Today: The Trade
Selling the Aug. 2-expiration 400-strike put option and buying the 395 put would create a bull put spread. This spread was recently trading for around $0.80 per set of put contracts. That means a trader selling this spread would receive $80 in option premium and would have a maximum risk of $420.
That represents a 19% return on risk between now and Aug. 2 if MSFT remains above 400. If Microsoft stock closes below 395 on the expiration date the trade loses the full $420.
The break-even point for the bull put spread stands at 399.20. Calculate it by taking 400 less the 0.80 option premium per contract. There is little room for adjustment with short-term trades such as this held over earnings.
All said, a 19% return in a few days would be nice in Microsoft stock. But the possibility of losing 100% is also very real. As such, this style of trade is only for traders with a high-risk tolerance.
Is Microsoft Stock A Buy Now? Here's The IBD View
Leader In The Market
According to IBD Stock Checkup, MSFT stock ranks No. 1 in its group. The cloud computing and AI powerhouse has a Composite Rating of 73, an EPS Rating of 97 and a Relative Strength Rating of 71.
The last time we looked at a trade like this was on Goldman Sachs, which worked out well.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
