The beauty of options trading is that regardless of whether the underlying stock rises, falls, or remains stagnant, you have the opportunity to profit. Microsoft stock currently presents such a trading opportunity.
An indicator that measures the value of option prices – Microsoft Volatility – has been on the rise in the past few days. With the earnings season not yet here, the increase in volatility presents interesting opportunities for option traders.
U.S. Treasury yields and rising oil prices have pushed up the implied volatility of “magnificent seven (the seven major tech giants)” as a whole. Microsoft has also been affected by its own unique event: last week, the company announced a major overhaul of Copilot. This overhaul integrates chat, code writing, and AI autonomous intelligent agents into a single application, in order to compete with Anthropic’s Claude. As soon as the news was released, Microsoft’s stock price soared by nearly 3.7%, setting a new closing high for this year.
Driven by the aforementioned events, Microsoft's current implied volatility is currently above the 60th percentile for the year, which is significantly higher than that of most of the seven major tech giants.
It is worth noting that volatility had already started to rise in advance before the release of the financial reports. The higher the implied volatility, the more expensive the option premium; this means that sellers can collect a higher premium and are expected to profit from the decline in volatility before the next major catalyst event occurs.
Trading Strategy: Iron Eagle Combination ( Iron condor )
Sold the October 16 expiration 485/475 put option spread, and at the same time sold the October 16 expiration 535/545 call option spread, for a total premium of approximately $2.99.
This strategy is a short Iron Eagle option combination, which is considered a neutral strategy. If by October 16th, the price of Microsoft's stock remains above the strike price of $485 for the put options and below the strike price of $535 for the call options, this trade will achieve a maximum profit of $299.
This neutral strategy is based on two realities: the positive implications of the Copilot upgrade have already been priced into by the market; Microsoft's stock price has been relatively stable (trading sideways) throughout September. The 485-dollar put option is slightly below this month's lowest stock price; the 535-dollar call option is more than $15 higher than the peak price reached after the positive news of Copilot. This leaves a buffer zone above and below the stock price range formed this month. The strategy's goal is simple: by the expiration date, the stock price should be lower than the strike price of the sold call option and higher than the strike price of the sold put option, betting on the stock price to remain sideways.
Strategic break-even point: $538 above and $482 below. The main risks of this trade are that the stock price will break above $545 or fall below $475 before expiration. If the stock price touches one of these levels within 17 days (representing a fluctuation of about 7% from Monday's closing price), the estimated maximum loss would be $701. The theoretical probability of achieving a profit by taking on this risk is 63%.
Additionally, the theoretical probability of achieving half of the maximum profit (P50) is 73%. This indicates that it is appropriate to close the position in advance rather than holding it until maturity; a profit of about $150 can be realized at that point. A note on risk: if the stock price falls below $485 before maturity, the sold put option may be exercised, and the trader will be obligated to buy 100 shares of Microsoft stock at $485. Including the $2.99 premium received, the actual cost of holding the position will become $482.01, which represents a decrease of about 7.2% from the high of the year. For some traders, obtaining shares at a price near the level before the positive news is announced is also an acceptable outcome.
The positive factors have been fully reflected in the stock price; the next major catalyst will occur several weeks after the expiration of options contracts on October 16th; volatility has also risen in advance before the financial report. Therefore, this trade relies on the passage of time and the decay of option premiums to profit, rather than betting on a one-way increase or decrease in the stock price.
