Microsoft Drifts Higher Ahead Of Earnings; Here's How An Options Earnings Play Could Net $200 | IBD

TL;DR

The proposed Microsoft (MSFT) earnings play is a January 27 iron condor designed to collect about $200 in premium if the stock stays within a limited range. It combines a 230/225 bull put spread with a 252.50/257.50 bear call spread, producing a $228–$254.50 profit zone and $300 maximum risk. Read on for the setup, rationale, and key risks.

Transcript

foreign Traders for today's trade we're looking at an iron Condor option play in technology Giant and DOW Jones component Microsoft the stock has been drifting higher alongside the overall Market since putting in a low on January 6th shares have reclaimed their 21 day line and their 50-day line as well but the stock has been a significant downtrend... Read More

Key Insights

• 📈 Microsoft stock has been trending upwards but is still in a downtrend overall.
• ❓ The stock has upcoming earnings, which can be a catalyst for price movement.
• ♻️ An iron condor options strategy is recommended to take advantage of the expected limited movement.
• 🧔 The strategy involves selling a bear call spread and a bull put spread.
• 🧡 Traders anticipate the stock to stay within a range after earnings.
• ♻️ The profit zone for the iron condor trade is between $228 and $254.50.
• ✳️ The maximum risk in the trade is $300.

Questions & Answers

Q: How could a Microsoft options earnings play net about $200?

The proposed iron condor generates around $2 per contract, or $200 in premium. It is designed to profit from time decay if Microsoft does not move too much after its earnings report.

Q: What is the Microsoft iron condor trade setup?

Using the January 27 expiration, the trade sells a 230 put and buys a 225 put to form the bull put spread. It also sells a 252.50 call and buys a 257.50 call to form the bear call spread.

Q: What is the profit zone for this Microsoft iron condor?

The profit zone ranges from $228 to $254.50. It is calculated by subtracting or adding the premium received to the short strikes.

Q: What is the maximum risk of the Microsoft iron condor trade?

The maximum risk is $300 because both credit spreads are $5 wide and the trade receives about $200 in premium. As a risk-defined strategy, its maximum loss potential is known before entering the trade.

Q: Why use an iron condor before Microsoft earnings?

Microsoft was anticipated to move 4.9% up or down following the earnings release, and it stayed within the expected range after three of its previous six earnings announcements. Traders expecting a limited move could use an iron condor to seek profit from time decay.

Q: What earnings results were expected from Microsoft?

Consensus estimates called for earnings of $2.30 per share, down 7.3% year over year. Expected revenue was $53 billion, with the report scheduled for Tuesday after the market closed.

Q: How was Microsoft stock performing before earnings?

Microsoft had drifted higher with the broader market after reaching a low on January 6 and had reclaimed its 21-day and 50-day lines. However, it remained in a significant downtrend dating from the end of 2021 and had a 55 Composite Rating, a strong EPS Rating, and a 26 Relative Strength Rating.

Q: What happens if Microsoft moves outside the expected range?

If Microsoft stays within the expected range, the iron condor can work as intended without requiring management. A larger-than-expected move causes losses, and the transcript warns that options are complex and investors can lose 100% or more of their investment in some cases.

Summary & Key Takeaways

• Microsoft stock has been steadily rising but is still in a downtrend and has upcoming earnings.

• An iron condor strategy is suggested to take advantage of the expected range of movement.

• The strategy involves selling a bear call spread and a bull put spread, with a limited maximum loss potential.