Shares of Microsoft (MSFT) have made a strong move this month ahead of Thursday’s earnings announcement. The move from $44 to roughly $48 has bullish traders betting on a push past $50, but we know what happens when too many people lean to one side of the boat.
The 52-week high for MSFT is $50.05. Shares made a run towards this level in early August and in late April before fading lower again. The same type of setup could be in the works if the company misses earnings expectations.
On the other hand, if Microsoft tops estimates on both the top and bottom line and raises its current-quarter outlook, shares have a good chance of clearing $50 and setting fresh highs.
Wall Street is expecting 59 cents per share on revenue of $20.97 billion. A beat by a penny or two with sales north of $21 billion would be a nice headline. Anything less than the aforementioned forecast could lead to a backtest to $46-$44 and the major moving averages.
Microsoft beat estimates by 4 cents in the most recent quarter. It posted a 10-cent beat, a match, and a 5-cent beat in the preceding three reports. This quarter’s results will depend on how well its Windows 10 operating system was received, as the upgrade was released in late July in 190 countries.
MSFT Stock Options
The MSFT November $50 calls look “cheap” at current levels and have been active lately. These calls would double if shares trade to $51 by mid-November. However, these calls will likely expire worthless if shares fade to the mid-$40s on an earnings miss.
The MSFT November $45 puts are being targeted by bearish traders, but they look slightly expensive. Shares would need to trade down to $43.70, technically, by mid-November for the trade to double.
These options together would create a strangle option trade with a combined premium of roughly $1.15. The breakeven prices would $51.15 or $43.85, and a double would occur if shares clear $52.30 or fall below $42.70 by mid-November.
There are weekly options that trade on Microsoft, but the premiums are also slightly inflated heading into the earnings announcement.
Given the risk/reward setup, I will likely stay on the sidelines until after the news is released. Once the dust settles, there could be a trade in MSFT based on what the company reports and the stock’s technical picture afterwards.
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