On CNBC's Options Action, Dan Nathan spoke about an options strategy that he would use for Microsoft Corporation MSFT ahead of earnings report.
He thinks the stock is going to trade to $60 after the earnings report, but he isn't very bullish because its valuation is high and it has under performed the broad market. Nathan also doesn't like the LinkedIn deal.
To trade the earnings report, Nathan wants to buy the October 57.5 call for $1.45. The premium that he has to pay is approximately 2.5 percent of the current stock price and over the last four quarters, the stock has moved 7 percent on average, on earnings report. The trade breaks even at $58.95 or 2.34 percent higher and Nathan can maximally lose the premium. If Microsoft jumps 7 percent from the current price after the earnings, it would reach $61.63 and that would make a profit of $2.68 for this trade.
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