Microsoft Corporation (MSFT) Stock Could Return 1,400% After Earnings
It’s time to talk Microsoft Corporation (NASDAQ:MSFT) earnings. Yes, Microsoft’s fiscal first-quarter 2018 earnings report is still a little more than a month away, but if you’re a Microsoft stock bull, there’s an excellent opportunity for huge returns just waiting in the October options series.
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Before we dive into the trade, let’s take a look at why you should be a MSFT bull right now. Microsoft stock is in the midst of a strong year-long rally along support at its 20-day and 50-day moving averages.
Throughout this rally, MSFT has taken out several key resistance levels, including its recent break above $75 into fresh all-time high territory.
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What’s more, the shares are far from overbought, meaning that there is plenty of room left for more buyers to join the fray, thus extending Microsoft’s rally.
From the fundamental side, Microsoft has topped Wall Street’s estimates in each of the past five reporting periods. Looking at the coming first-quarter report, analysts are looking for a profit of 71 cents per share on revenue of $23.46 billion.
With continued dominance in web services via its Azure platform, and cyclical demand for PC and server hardware, Microsoft should once again top expectations when the company reports on Oct. 26.
Turning to the sentiment front, MSFT remains a bullish favorite on Wall Street. Thomson/First Call reports that 25 of the 34 analysts following Microsoft stock rate the shares a “buy” or better — a reading that has dipped slightly over the past two months. Meanwhile, the 12-month price target rests at $80.70, leaving room for potential price-target increases following another solid quarterly report.
As for MSFT options traders, bulls abound in the October series. Specifically, the Oct. 27 put/call open interest ratio currently sits at 0.42, with calls more than doubling puts among near-term options.
Implieds, meanwhile are pricing in a potential post-earnings move of about 5.2% for Microsoft stock. This places the upper bound at $79, with the lower bound coming in near $72. Implieds are currently trading near historical levels for MSFT stock, meaning that options are pretty fairly priced.
2 Trades for Microsoft Stock
Call Spread: Those looking to bet on a continued run higher for Microsoft might want to consider an Oct 27 $77/$77.50 bull call spread. At last check, this spread was offered at just 3 cents, or $3 per pair of contracts.
Breakeven lies at $77.03, while a maximum profit of 47 cents, or $47 per pair of contracts — a potentially whopping 1,466% return — is possible if MSFT stock closes at or above $77.50 when Oct 27 options expire. What’s even better is that this spread lies well within MSFT’s current expected move prior to expiration.
Put Sell: If a more neutral-to-bullish stance is more your speed, then an Oct 27 $70 put sell position has an excellent chance at finishing out of the money. At last check, this put was bid at 50 cents, or $50 per contract. On the upside, traders will keep the initial premium received as long as Microsoft stock closes above $70 when Oct 27 options expire.
The downside is that should MSFT trade below $70 ahead of expiration, traders could be assigned 100 shares for each sold put at a cost of $70 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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