Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
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.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)