The beauty of options trading is that it's possible to make money whether a stock price rises, falls, or remains almost unchanged. Microsoft's current stock price trend provides such an opportunity.

Microsoft's volatility – which is a measure of how expensive its option prices are – has been on the rise in the past few days. This increase presented an opportunity worth noting for option traders at a very early stage, long before the release of its financial reports.

Rising U.S. Treasury yields and oil prices have kept the implied volatility of the "Big Seven" U.S. stocks at a high level. However, Microsoft also has its own unique catalysts; for example, last Friday it announced a major overhaul of Copilot. This overhaul aims to compete with Anthropic's Claude by integrating chat, programming, and autonomous proxy tools into a single application. After the announcement, Microsoft's stock price soared by nearly 3.7%, pushing it to a record high closing price this year.

This also continues to drive up Microsoft's implied volatility. Currently, its implied volatility is at the upper 60th percentile of the volatility range over the past year, which is significantly high and also exceeds that of most of the "Big Seven" companies in the U.S. stock market.

This high volatility is noteworthy as it began to accumulate well in advance of the company's next financial report release. Higher implied volatility means richer option premiums, allowing premium sellers to earn more income and potentially profit from a moderate decline in volatility before the next catalyst appears.

This transaction: Iron Bald Eagle Strategy

I sold put spreads with an expiration date of October 16 and strike prices of $485/475, as well as call spreads with an expiration date of October 16 and strike prices of $535/545, for a total premium of approximately $2.99.

This trading structure is a short iron condor. It is a neutral strategy. If by October 16th, Microsoft's stock price is still above the strike price of $485 for the put option and below the strike price of $535 for the call option, then the maximum profit from this trade would be $299.

This neutral structure reflects two factors: firstly, the catalytic factor of Copilot has already been factored into market pricing; secondly, Microsoft has remained relatively flat for most of September. The put option strike price of $485 is slightly below this month's low, while the call option strike price of $535 is more than $15 above the high point after the announcement of Copilot. This leaves room on both sides of the range that Microsoft has formed this month for this position. The goal of this structure is quite simple: it is hoped that by expiration, the stock price will be below the strike price of the put option sold and above the strike price of the call option sold. In other words, this trade is betting on the stock price remaining stable.

The break-even stock price for this trade is $538 in the upward direction and $482 in the downward direction. The real risk lies in the stock price breaking through either of the buy-in strike prices before expiration. If Microsoft's stock price rises above $545 or falls below $475 within the next 17 days—roughly equivalent to a 7% fluctuation from Monday's closing price—then the expected maximum loss for this trade would reach $701. The reward for taking on this risk is a theoretical profit probability of 63% for this position.

In addition, “P50” – which represents the theoretical probability of achieving half of the maximum profit – is 73%. This means that this trade is more suitable as a candidate for early management rather than holding it until maturity; once a profit of around $150 is obtained, one can consider locking in the gains. Furthermore, if Microsoft’s price falls below $485 before maturity, the sold put option may be exercised, which means there is an obligation to buy 100 shares at that price. After accounting for the $2.99 premium, the actual holding cost will drop to $482.01, which is approximately 7.2% lower than the high point of the year. For some traders, holding these shares at a level slightly below the pre-announcement price may be an acceptable outcome. With the “Copilot” message having been digested by the market, the next known significant catalyst occurring several weeks after the option expiration on October 16th, and volatility remaining high well before the financial report, the design goal of this trade is to profit from the passage of time value and the decay of the premium, rather than betting on a specific direction.

Disclosure:Spina holds this transaction.

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