A couple weeks back it was like the good old growth and glamour days of yore for Microsoft Corporation (NASDAQ:MSFT) on the heels of a surprisingly upbeat and well-received earnings confessional.
But in case you missed the dramatic move or perhaps had the chart mistakenly turned upside down and viewed the tech giant with a bit too little respect — it’s not too late to get on board a bullish change of character in shares of Microsoft with attractively-priced MSFT options.
The Microsoft stock price hasn’t been associated with unexpectedly large upside reactions to earnings reports in quite some time. Late April’s announcement went a long ways towards changing the weakened trend, with shares of MSFT ripping higher.
Microsoft blasted earnings by 11 cents on profits of 62 cents a share, grew and bested Street revenue forecasts and made what looks to be impressive strides in products like its Surface 3 and cloud-based services. And MSFT stock soared by nearly 10.5%
What’s also a nice wind aimed at MSFT’s back is the tech sector, which has historically performed quite strongly during the six months leading up to and the six months following the first interest rate hike. In fact, tech has performed the strongest of all sectors in gaining an average of 11% in the immediate aftermath of an upward move in rates.
And with the increased preparation of that day arriving sooner rather than later; this appears to be another favorable support for MSFT shares.
MSFT Weekly Chart
Earnings can be tricky affairs as investor reaction doesn’t always align itself with the report itself. But in instances like in MSFT stock and wherein the company easily beat views and investors showed an equally supportive and game-changing move in shares, it speaks volumes to us, as does the chart statistic itself in conjunction with the MSFT price action.
Aside from strong support from buyers, not shorts mind you as that statistic has been at a miniscule 1%; the price spike in MSFT also systematically reversed what had been a fairly bearish chart. Admittedly, the move is one which caught some prior analysis of ours by surprise.
Now and after nearly four weeks since reporting, shares of MSFT have continued to maintain their composure above the 62% Fibonacci level. What’s more the consolidation is taking on the shape of a bullish weekly handle within what can be called, in hindsight, a corrective cup-shaped base.
While we can’t point at MSFT shares and say it’s like 1999 all over again, the chart and earnings narrative are compelling reasons to view Microsoft much more optimistically than a month prior and perhaps, at any point in the last couple years.
MSFT Long Call Strategy
Taking the pulse of MSFT volatility readings in the chart provided, we can see implieds have continued to be pressured since the earnings report in late April. That’s not entirely surprising.
Much more unexpected and viewed as both a character change and modest benefit in MSFT for a bullish long call strategy is underlying Microsoft stock volatility has continued to hit relative highs.
The divergence between the two types of volatility provide the limited risk, long call strategy with a theoretical price edge. This is due to the premium purchased being priced at a very decent-sized discount of roughly 40% to MSFT stock’s own ups and downs over a period approaching four weeks since the earnings report.
Checking the MSFT option board for ideas on just what call to purchase, I like the August $48 call priced at $1.70 as a long call candidate. To further minimize risk and respect the low in the MSFT handle; barring a price gap, one could reasonably contain the loss in the call to 35% to 50% of the premium using a stop on the option if shares went below $46.02 in the next couple weeks.
On the reward side of this limited risk contract, breakeven is just above the recent MSFT handle high of $49.68 come expiration. Prior to that day, and still 100 days out, any move to reclaim that level is going to generate some type of profit.
In fact, if enthusiasm in MSFT stock were to produce a re-test of those highs in the next month, the profit should, at a minimum, produce a gain of about 50% or 85 cents. And with multi-year and pattern highs just above at $50.05, a much larger move from a favorable chart could be a game-changer for MSFT bulls.
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 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
