Microsoft (MSFT) FQ4 Earnings Preview & Trade Ideas

by Dan July 19, 2018 1:22 pm • Trade Ideas

Microsoft (MSFT) will report their fiscal Q4 earnings tonight after the close. The options market is implying about a 3.5% move in either direction which is rich to its 2.25% average one-day post-earnings move over the last four quarters.

Shares of MSFT, up 22% on the year are massively outperforming the S&P 500 up 5% and the Nasdaq, up 22%, and is now one of four stocks, in addition to AAPL, AMZN & GOOGL sporting a market capitalization equal to or greater than $800 billion.

The one year chart below very clearly shows healthy technical support down near the recent low towards $97.50, which was at the prior breakout to new all-time highs in early June which also happens to intersect with the one-year uptrend:

Shares of MSFT appear cheap(ish) on a P/E to Growth metric on the current fiscal year which should see mid-20s percent eps growth, with the stock trading about 27x. But its important to consider what the company will guide for fiscal 2019 where analysts already see a meaningful downshift in year over year growth, with the consensus in the mid-single digits on 10% sales growth, per Bloomberg:


Wall Street analysts are overwhelmingly bullish on the stock with 31 Buy ratings, and only 2 Holds and 2 Sells. One of those Buys… Credit Suisse’s Brad Zelnick remains bullish on the stock near all-time highs and highlights the following to look for in the print:

So what’s the trade into the print?

Yesterday there appeared to be a long holder of the stock rolling up short calls from an overwrite. When the stock was just below $105 a trader bought to close 15,000 Aug 3rd weekly 109 calls and sold to open 15,000 Aug 3rd weekly 110 calls. While the $1 roll in the same expiration doesn’t make a lot of sense to me, it is pretty clear that the new position was a call sale, and most likely against long stock in an effort to take advantage of elevated short-term options premiums.

If I were long the stock, not going to sell into the print, I might consider an overwrite. For instance…

Yield Enhancement Idea: Vs 100 MSFT long at $104.58 sell to open 1 Aug 110 call at 95 cents

Break-even on Aug expiration:

Profits of the stock up to 110, capped there but receive the 95 cents for selling the call, so the effective Callaway level is $110.95, up 6% in a month.

Losses of the stock below current levels less 95 cents premium for the call sale.


If I were long and worried about a sharp decline following results I might consider a collar... for instance

Hedge Idea: MSFT ($104.58) Buy Aug 110 / 100 collar for 25 cents

-Sell to open 1 Aug 110 call at 95 cents

-Buy to open 1 Aug 100 put for 1.20

Break-Even on Aug expiration:

Profits of stock up to 110 (less 25 cents premium for the cost of the collar), called away at 110 or higher

Losses of the stock down to 100, protected below.

In both cases on expiration if the stock was above the short call strike you could cover the short call for a loss and keep the long stock position intact.

Lastly, if i wanted to make an outright bearish bet, at the money options appear dollar cheap, for instance…

Defined Risk Bearish: MSFT ($104.80) Buy July 105 put for $2

Break-even on July expiration (tomorrow’s close);

Profits below 103

Losses of up to 2 between 103 and 105

Rationale: this trade is slightly in the money, but very binary, get the direction wrong and you lose all the premium.