Investing with options: Microsoft earnings in focus

Investing with options: Microsoft earnings in focus

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  Microsoft's anticipated earnings release opens a realm of investment opportunities. Our latest piece provides an in-depth preview and reveals tailored options strategies for potential market movements. Don't miss out on actionable insights tailored for this earnings season.


Investing with options: Microsoft earnings in focus

 
Investors often contemplate the age-old question of "Where to invest next?". For those following the tech industry, Microsoft's upcoming earnings release presents an intriguing opportunity, especially when using options as a tool.
Microsoft, the tech behemoth, is anticipated to post robust numbers for the upcoming quarter. Analysts project an EPS of $2.65 and revenues nearing $56.19 billion, indicating a year-over-year growth of 13% and 8%, respectively. With its accelerating growth in cloud computing via Azure, soaring Xbox sales, and the growing acceptance of Surface devices, Microsoft has established itself as an industry leader. However, challenges like global shipping issues, formidable competition, and regulatory concerns can't be ignored. Yet, Microsoft's history suggests it's adept at surpassing expectations.
 
For options enthusiasts, this scenario offers a plethora of strategies. Below, we outline some of them while emphasizing the risks and rewards associated.
 
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.
 

1. Bullish outlook - buying call options:

Considering Microsoft's recent somewhat range-bound price movement, a potential breakout might be on the horizon.

Strategy: Buy a call option with an extended expiration.

  • Execution: BuyToOpen 1 20-Sep-2024 Call 280 @ $75.90 (Delta: 0.80).
  • Premium:
    • Per share: $75.90 (debit)
  • Premium and risk:
    • Premium cost: $75.90 x 100 (per contract) = $7,590
    • Max risk: $7,590 (if Microsoft remains below 280 at expiry)
    • Max reward: Significant (gains rise as Microsoft's stock price rises)
  • Breakeven point: $280 (strike) + $75.90 (premium) = $355.90

  • Rationale: This provides ample time for the stock to possibly appreciate, minimizing the adverse effects of time erosion (often referred to as "theta decay").
 

2. Alternative bullish approach - acquiring stock via ITM put options:

 
A less direct but viable method to acquire Microsoft shares involves selling in-the-money put options.

Strategy: Sell a put option.

  • Execution: SellToOpen 1 27-Oct-2023 Put 340 @ $12.55 (Delta: -0.65).
  • Premium:
    • Per share: $12.55 (credit)
  • Premium and risk:
    • Premium cost: Received = $12.55 x 100 = $1,255
    • Max risk: Significant (if Microsoft's price falls considerably below the strike price)
    • Max reward: $1,255 (if Microsoft is above 340 at expiry)
  • Breakeven point: $340 (strike) - $12.55 (premium) = $327.45

  • Rationale: Should the option be exercised, you'd essentially purchase the stock at a reduced price, factoring in the premium received.

 3. Bearish sentiment - buying put options:
 
For those skeptical about Microsoft's immediate future, put options offer a hedge.

Strategy: Buy a put option with a longer expiration.

  • Execution: BuyToOpen 1 20-Sep-2024 Put 375 @ $53.85 (Delta: -0.64).
  • Premium:
    • Per share: $53.85 (debit)
  • Premium and risk:
    • Premium cost: $53.85 x 100 = $5,385
    • Max risk: $5,385 (if Microsoft is above 375 at expiry)
    • Max reward: Significant (gains rise as Microsoft's stock price falls)
  • Breakeven point: $375 (strike) - $53.85 (premium) = $321.15

  • Rationale: This provides flexibility in gauging the stock's downward movement over an extended period.
 

4. Neutral stance - covered calls:

Existing Microsoft shareholders can derive additional income by executing covered calls.

Strategy: Write a covered call.

  • Execution: SellToOpen 1 03-Nov-2023 Call 350 @ $3.05 (Delta: 0.23).
  • Premium:
    • Per share: $3.05 (credit)
  • Premium and risk:
    • Premium cost: Received = $3.05 x 100 = $305
    • Max risk: Loss of stock's upward potential above $350, but keeps premium
    • Max reward: $305 (if Microsoft is below 350 at expiry)
  • Breakeven point: Current Stock Price - Premium = $254.92 - $3.05 = $251.87
  • Yield:
    • Yield over 14 Days: 1.20%
    • Annualized yield: 31.29%
  • Rationale: This can generate short-term premium income, with a willingness to part with shares at the strike price.
  • Comparison with conventional stock purchase: If you already own Microsoft shares, this strategy allows you to earn a yield of 1.20% over 14 days, potentially annualizing to more than 30% if replicated successfully throughout the year.

 

Concluding Thoughts:

The strategies highlighted emphasize the importance of time. By selecting options with extended expirations, we give the underlying asset adequate time to realize our thesis, without being significantly impacted by time erosion. For those new to the terminology, think of "time erosion" as a diminishing factor affecting the option's value as time progresses.
 
As always, it's crucial to weigh both risks and rewards before implementing any strategy. Microsoft's earnings release, like all investment opportunities, offers no guarantees. But with careful planning and strategic choices, it provides a playground for both seasoned and novice options traders. And remember, whether before or after the earnings release, your risk appetite dictates the play.

Happy investing!

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.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    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...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    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...
  • FX Outlook: USD in limbo amid political and policy jitters

    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 ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.