MSFT Preview: 1 Trade for Microsoft Stock Ahead of Earnings

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Tech giant and ubiquitous index constituent Microsoft Corporation (NASDAQ:MSFT) will report first-quarter results after the closing bell Thursday. While far removed from its go-go days of gargantuan growth, Microsoft is a market heavyweight with considerable influence.

MSFT Preview: 1 Trade for Microsoft Stock Ahead of EarningsAnd on occasion still, Microsoft stock has used its muscular heft and former volatility to call home-gamers into action away from their Xbox systems.

In front of Thursday’s announcement, Wall Street expects Microsoft to produce earnings of 51 cents a share compared to the prior year’s 68 cents. Over the past year the company has produced three upside profit surprises of approximately 10% apiece and one smaller earnings miss of -3.3% for Microsoft stock.

Investor reaction in MSFT has been more apologetic or obviously focused on the fine print and details beyond the headline profit number. Over the same four reports, Microsoft stock saw two mostly flat results of 0.1%, a modest gainer of 2.5% and one slippery drop of -9.2% last quarter despite the company announcing one of its three 10% profit beats.

When all said and done, Microsoft’s post earnings movement has resulted in an average return of -1.6% if calculated using up and down trader reactions. Using an absolute value and Microsoft stock has averaged 3% with a one standard deviation of 4.3%.

Microsoft Stock Weekly Trading Chart

MSFT Preview: 1 Trade for Microsoft Stock Ahead of Earnings
Source: Charts by TradingView

In front of Thursday night’s earnings report and as Microsoft stock’s daily trading chart reflects, shares of MSFT have been consolidating since its last report in late January, which sent the stock tumbling lower on a bearish gap reaction.

The subsequent price action, while somewhat loose and imperfect, takes on the shape of a bearish descending triangle in MSFT stock. The consolidation also marks a period in which shares of Microsoft have remained below a former weekly uptrend line that was broken with the most recent earnings event.

Interesting or perhaps ironic, despite the roughly 10% trading range of the past three months that’s developed the bearish triangle; shares of Microsoft are sitting squarely on the reaction price from the last event.

Microsoft Stock Active Options

During Tuesday’s session the regular Microsoft May contract dominated the action, with calls favored by about a 2.5-to-1 margin. On the call side, the at-the-money May $43 traded 4,300 contracts before closing at 93 cents. Much larger open interest of around 29,000 fails to give any strong insight as to what type trader was dominant in that order flow.

To breakeven as a buyer on an expiration basis, shares of MSFT would need to climb slightly less than 3% to $43.93 and essentially test the current pattern highs of the bearish triangle.

On the put side, about 3,600 May $41 puts changed hands on also much larger open interest 19,000 thereabouts. A closing price of 52 cents would require a long put holder a move in Microsoft shares of around 5.2% to break even at $40.48. The steeper move is similar to the call as far as a drop of that magnitude would represent a technical test situation of the pattern at hand.

Microsoft Stock Volatility 

Looking again at the trading chart, implied volatility as represented by the blue line is elevated. It’s not extreme, but definitely interpreted as rich in relation to Microsoft stock underlying volatility and around the high mark of past events.

For the actual Microsoft May contract, 24% implied volatility, or IV, means traders expect a 68% chance shares of MSFT will remain roughly between $40 and $45.25 — or up or down about 6% for the next 24 calendar days.

Based on what was summarized of investor MSFT stock reactions from recent Microsoft earnings reports, sellers of premium looking to take advantage of this wide price range hold the trading edge.

In the MSFT Apr 24 weeklys and what amounts to as the earnings pure play option, 59% IV works out to a +/- move of $2.28 with three days to expiration. That means traders expect a 68% chance Microsoft stock will remain within $40.36 to $44.92.

Comparatively and in keeping with the estimated move, the actual dollar value of the MSFT Apr 24 weeklys $42.50 straddle is priced slightly lower at $1.71, with expiration breakevens of $40.79 and $44.21 in Microsoft stock.

Again, relatively high implieds in Microsoft options and our recent but small sample of earnings reactions suggest straddle sellers maintain the positional edge over buyers of this long premium strategy.

Microsoft Stock Options Trade

Given a mostly bearish technical backdrop, Microsoft options pricing that favors selling premium but also appreciating piece of mind that comes with limited risk strategies; selling an out-of-money Apr 24 weekly $44.50/$45.50 vertical call spread for 12 to 13 cents is interesting.

The breakeven of $44.62 is narrowly below the estimated one standard deviation of $44.92 for MSFT stock. However, the trader’s return over three days is 12% if Microsoft remains below $44.50, which would require a bullish breach of the existing pattern and last quarter’s investor re-pricing of shares. And were that less likely event to occur, risk would be absolutely contained to 88 cents.

As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2015/04/msft-preview-1-trade-for-microsoft-stock-ahead-of-earnings/.

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