Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
You can access both of our platforms from a single Saxo account.
Smart Investor - exploring Microsoft earnings: strategic options play for active investors
Koen Hoorelbeke
Investment and Options Strategist
Summary: Microsoft's latest earnings report beat expectations, with AI-driven cloud growth surging 157% year-over-year. Pre-market the stock slips however. For active investors, a covered call strategy on MSFT can generate income while managing risk, with alternative options plays available for both range-bound and bearish outlooks.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.
Microsoft's earnings and the AI narrative
Microsoft has just released its latest earnings report, revealing a 12% year-over-year revenue increase to $69.6 billion, with earnings per share at $3.23, both surpassing market expectations. One of the standout figures is the 157% growth in AI-related cloud services, now generating $13 billion annually. However, scaling infrastructure to meet the AI boom remains a key challenge.
The earnings results are out, but the market has yet to react fully before the U.S. open. For active investors, this presents an opportunity to implement strategic options plays to manage risk while capturing potential upside.
Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
A covered call: enhancing yield while keeping upside open
A covered call involves holding 100 shares of MSFT and selling a call option against them. This generates premium income, offsetting potential downside risk while capping gains above the strike price.
Trade setup:
- Stock price at entry: $444.90
- Strike price: $470
- Expiration: March 7, 2025 (37 days out)
- Premium received: $5.88 per share ($588 total)
- Max profit: $3,098.75 (if MSFT reaches or exceeds $470)
- Breakeven price: $439.01 (stock price - premium received)
- Chance of profit: 56%
Why choose this trade?
- If MSFT stays below $470, the investor keeps the full premium.
- If MSFT rallies above $470, gains are capped, but the investor still profits.
- This is a neutral to moderately bullish strategy, providing income generation while limiting excessive downside risk.
Risk considerations
Every options strategy carries risks, and the covered call is no exception:
- Limited upside: If MSFT surges past $470, the investor forgoes additional gains beyond the strike price.
- Stock exposure: Holding MSFT shares means the investor is still vulnerable to a decline in the stock price.
- Early assignment risk: The short call could be exercised early if MSFT rallies quickly, especially if the call moves deep in the money.
- Liquidity & volatility: Option pricing and spreads can fluctuate significantly post-earnings, impacting trade management.
It's essential for investors to weigh these risks before implementing the strategy.
Alternative strategies for different market views
While the covered call suits investors with a neutral-to-bullish outlook, two other strategies could be considered based on different expectations for MSFT’s post-earnings performance:
Range-bound expectation: Covered strangle
- Sell a lower strike put and a higher strike call (e.g., sell the 430 put and 470 call).
- This increases premium collected but exposes the investor to downside risk if MSFT drops.
Bearish expectation: Risk reversal
- Sell a call option and use the premium to buy a put option (e.g., sell the 470 call and buy a 430 put).
- This creates a bearish position with limited upside and a defined downside hedge.
Conclusion
Microsoft’s earnings report has reinforced its dominance in AI, but challenges remain in scaling its infrastructure to match demand. For active investors, a covered call offers an effective way to generate income while maintaining upside exposure. For those expecting a range-bound move, a covered strangle may provide additional premium, while a risk reversal offers a hedge against potential downside.
With market reactions still developing, investors should assess their outlook and risk tolerance before executing any options strategies.
| Related articles/content |
|---|
| Tech Titans Earnings Microsoft Tesla Meta | 30 Jan 2025 Three Magnificent Tech Titans in Focus Why Tesla Meta and Microsofts Results Matter | 27 Jan 2025 Microsoft Q2 2025 Earnings Preview All Eyes on AI and Cloud | 27 Jan 2025 |
| More from the author |
|---|
| Koen Hoorelbeke's articles on Saxo Follow Koen Hoorelbeke on BlueSky social media platform |
| Check out these guides and case studies: |
|---|
| In-depth guide to using long-term options for strategic portfolio management Our specialized resource designed to learn you strategically manage profits and reduce reliance on single (or few) positions within your portfolio using long-term options. This guide is crafted to assist you in understanding and applying long-term options to diversify investments and secure gains while maintaining market exposure. |
| Case study: using covered calls to enhance portfolio performance This case study delves into the covered call strategy, where an investor holds a stock and sells call options to generate premium income. The approach offers a balanced method for generating income and managing risk, with protection against minor declines and capped potential gains. |
| Case study: using protective puts to manage risk This analysis examines the protective put strategy, where an investor owns a stock and buys put options to safeguard against significant declines. Despite the cost of the premium, this approach offers peace of mind and financial protection, making it ideal for risk-averse investors. |
| Case study: using cash-secured puts to acquire stocks at a discount and generate income This review investigates the cash-secured put strategy, where an investor sells put options while holding enough cash to buy the stock if exercised. This method balances income generation with the potential to acquire stocks at a lower cost, appealing to cautious investors. |
| Case study: using collars to balance risk and reward This study focuses on the collar strategy, where an investor owns a stock, buys protective puts, and sells call options to balance risk and reward. This cost-neutral approach, achieved by offsetting the cost of puts with the premiums from calls, provides a safety net and additional income, making it suitable for cautious investors. |
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: The ride just got rougher
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
China Outlook: The choice between retaliation or de-escalation
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
Commodity Outlook: A bumpy road ahead calls for diversification
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX outlook: Tariffs drive USD strength, until...?
John J. Hardy
Chief Macro Strategist
-
Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
Disclaimer