The advantage of options trading is that you can make money whether the stock price rises, falls, or doesn’t rise at all. shares of microsoft We are giving you just such an opportunity right now.
Microsoft’s volatility, a measure of how expensive Microsoft options are, has increased in recent days. This increase presents an interesting opportunity for option traders long before taking profits.
The overall implied volatility of the Magnificent Seven remains elevated due to rising US Treasury yields and oil prices. But Microsoft has been exposed to its own set of triggers, including last Friday’s announcement of a major overhaul of Copilot. Shares soared nearly 3.7% on the news of Microsoft’s overhaul, which sought to compete with Anthropic’s Claude by combining chat, coding and autonomous agent tools into one app, pushing Microsoft’s shares to their highest closing price of the year.
Microsoft since the beginning of the year
This has led to Microsoft’s implied volatility continuing to rise, currently sitting in the low 60th percentile of its annual range, and significantly higher than most of the Magnificent Seven.
This increase in volatility is notable since it has been building up well in the lead up to the company’s next earnings report. The higher the implied volatility, the richer the premium. This means premium sellers may be able to raise more capital and take advantage of gradual volatility contraction before the next catalyst arrives.
Trade: Iron Condor
I sell the October 16th 485/475 put spread and the October 16th 535/545 call spread for a total credit of approximately $2.99.
This trade setup is a short iron condor. This is a neutral strategy with a maximum profit of $299 if Microsoft stock moves above the $485 strike put and below the $535 strike call by October 16th.
This neutral structure reflects two factors. One is that Copilot Catalyst is already priced in, and the other is that Microsoft has been pretty much flat for most of September. The $485 put is just below the monthly low, while the $535 call is more than $15 above the post-CoPilot high. This gives room for positions on both sides of the range Microsoft has set this month. The goal of this structure is simple. You want the stock to fall below the strike price of the call you sold and above the put you sold by expiration. In other words, you are playing for the stock price to remain constant.
The breakeven stock price has an upside of $538 and a downside of $482, so the real danger in this trade is a move beyond the long strike before expiration. If Microsoft falls above $545 or below $475 over the next 17 days, about 7% from Monday’s closing price, the estimated maximum loss would be $701. The trade-off of assuming this risk is that the theoretical probability of profit for this position is 63%.
Furthermore, the theoretical probability of recovering “P50”, or half of the maximum profit, is 73%. This supports treating this trade as a candidate for early management rather than holding it until expiry and locking in up to $150 when it becomes profitable. Additionally, you can assign a short put if Microsoft trades through $485 before expiration. This means you are obligated to buy 100 shares at that price. After factoring in the $2.99 credit, the effective cost basis drops to $482.01, approximately 7.2% below the annual high. For some traders, holding these stocks slightly below their pre-announcement prices may be a comfortable outcome. The CoPilot news is already priced in, with the next major known trigger coming weeks after the contract expiry on October 16th, and with volatility rising much more than gains, the trade is structured to benefit from time and premium decay rather than any specific direction.
Disclosure: Spina owns this transaction.
All opinions expressed by CNBC Pro contributors are solely their own and do not reflect the opinions of CNBC, its parent or affiliate companies, and may have been previously disseminated on television, radio, the Internet, or another medium. This content is provided as part of editorial output for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of a financial or investment advisor.
This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor.
Click here for full disclaimer.
