How To Capitalize On A Potential Microsoft Stock Move Ahead Of Tuesday's Earnings

Microsoft Corp MSFT is scheduled to announce its quarterly earnings on Tuesday.

Shares of the tech giant closed 3.57% higher on Friday at $240.22 level.

The open interest levels on Microsoft options expiring on Jan. 27 indicate a wide range for the stock price movement during the week with the $220-mark acting as a strong support and $250-level acting as a resistance. This is because the maximum Put open interest lies at the $220 strike price — at 6,970 contracts at the time of writing. The maximum Call open interest lies at the $250 strike at 5,621 contracts.

Also Read: How To Buy Microsoft (MSFT) Stock

Volatility is expected to rise in the run-up to the announcement of the results. One of the lower-risk strategies to capitalize this event would be to consider a long strangle.

Strategy: A long strangle involves buying slightly out-of-the-money Call and Put options, in equal amounts and belonging to the same expiry. Since Microsoft shares closed near the $240-mark on Friday, a potential way to capitalize on the anticipated volatility would be the buy the $235 Put options while simultaneously buying the $245 Call options as soon as the market opens on Monday and only if there is not gap-up or gap-down movement. A condition is that the stock should be trending near the $240 mark when this strategy is implemented.

Strategy Cost: The long strangle is a ‘net debit’ strategy, which means the total cost and the maximum potential loss will be the overall premiums paid. The $235 Put options traded at $3.63 while the $245 Call options traded at $3.7 on Friday. If these prices are taken into account, the total cost for the strategy comes to $7.33.

If volatility increases ahead of results and Microsoft stock moves significantly in either direction, either one of the options will explode in price while the other will lose value. The profit made on one side is expected to more than cover the loss made on the other leg in such cases.

In case the stock does not witness any major move in the next two days, a prudent step would be to exit both legs of the strategy to minimize losses.

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