Quarterly Outlook
Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
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Investing with options: Microsoft earnings in focus
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!
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.
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