Microsoft (MSFT) Option Traders Optimistic After Earnings

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Microsoft (MSFT) Option Traders Optimistic After Earnings

After Microsoft Corporation (MSFT) outperformed analysts’ expectations for its fiscal fourth quarter earnings reports, option traders’ actions indicate that they anticipate the stock price will grow in the future. This may come as a surprise given that the MSFT stock price dropped by less than 1% the day following the news.

Microsoft announced profits per share (EPS) of $2.17 and sales of $46.15 billion, exceeding analysts’ expectations of $1.92 and $44.24 billion, respectively. Despite the fact that chip supply bottlenecks are reducing Windows income from device manufacturers, Microsoft maintained optimistic revenue estimates for the future. Prior to the announcement, investors maintained MSFT share prices high, with a large amount of call options in open interest.

The number of option trades suggested that traders were selling puts and buying calls. Option activity after results shows that traders are still bullish on MSFT’s share price after the computer titan outperformed analysts’ estimates. This is because price action has stayed high, indicating that traders continue to sell options and purchase calls.

When the price movement of option trading activity and stock prices on the days after results is compared, there is some indication that option traders may be optimistic. This may come as a surprise given that MSFT’s stock declined less than 1% the day following results, while closing far above its 20-day moving average. Furthermore, put option activity surged while call option activity declined. This is possible because option traders think MSFT is now inexpensive and will trend upward in the short future.

Key Takeaways

  • Following the results report, traders and investors dumped Microsoft stock, which declined less than 1% the next day.
  • MSFT’s stock ended substantially above its 20-day moving average.
  • Put and call option activity looks to be geared toward a price increase.
  • The volatility-based support and resistance levels allow for a greater downward movement than an upward movement.
  • This strategy allows traders to benefit from a reversal in the earnings-based share price trend.
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Option trading is a literal gamble on market probabilities—a bet made by traders who, on average, know more about the market than most investors. Understanding the environment in which the pricing behavior occurred is critical to capitalizing on this understanding. The chart below displays MSFT’s share price activity on Friday, highlighting the setup after the earnings release.

Current Trends

Over the last month, the stock has moved in an unusual range, hovering considerably above the 20-day moving average until dropping less than 1% the day following the news. The price settled at the top zone shown by the technical studies on this chart.

The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array emphasizes how the price has stayed in the top range. This price movement in MSFT shares suggests that investors are optimistic in the stock’s share price in the future.

Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average amount of time employed in its computation is 10 to 20 time periods, which comprises two to four weeks of everyday trading.

Based on the price trend for MSFT reaching an all-time high before to the earnings release, chartists may see that traders were optimistic heading into results. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, it looked that traders expected MSFT to rise following results.

Tip

The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average, as well as an upper and lower line. Because the higher lines are produced by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an ideal visualization tool for displaying historical volatility.

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Trading Activity

Option traders’ recent activity suggests that they believe Microsoft shares are cheap and have acquired call options in the hope that the stock would close inside the box illustrated in the chart between now and Aug. 20, the next monthly expiry date for options. The price offered by call option sellers is shown by the green-framed box. It means that there is a 70% likelihood that MSFT shares will finish inside this range or higher by August 20. As a result, sellers are just modestly optimistic. Buyers, on the other hand, are picking up this pricing, implying that these choices are underpriced. Given that the pricing assumes just a 30% possibility that prices would close above the green box, it suggests that purchasers are ready to accept the long odds.

It is worth noting that open interest on Friday included almost 1.4 million call options against roughly 1.3 million put options, illustrating the bias that option purchasers exhibited, as traders preferred calls over puts. This usually means that option traders anticipate an increase in price fluctuation. The volatility has lessened substantially after results, but the number of put options in the open interest remains high, while the number of call options is growing. This indicates that put options are being sold rather than purchased, resulting in a positive attitude.

The call open interest vastly outnumbers the put open interest for strikes at the money and one step either way. Out-of-the-money put option volume is declining significantly quicker than out-of-the-money call option volume, indicating that more traders anticipate Microsoft share prices will climb than decrease.

A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric creates closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months.

The levels marked by the turns are noted in the chart below. What stands out in this chart is how close the call and put prices are, with lots of room to move lower. This indicates that option purchasers anticipate the share price is more likely to rise in the weeks following the report. Although investors and option traders anticipated favorable movement after the release, the share price moved less than it did following the last earnings announcement.

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These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, a significant shift in either way is probable in the near future. MSFT shares declined 2.83% the day after the last results report and continued to tumble the following week. Investors may not anticipate the same level of price movement in the week after this news. Because there is a lot of space in the volatility range, share prices might increase or fall more than anticipated in the short term; nevertheless, there is more capacity in the volatility range to support a move to the downside.

Wrapping Up

Microsoft easily above analysts’ estimates for earnings per share and sales. While supply restrictions reduced Windows revenue from device manufacturers, the business nonetheless delivered a record quarter and even beat analysts’ estimates for future projections. The share price declined less than 1% the day after the news was issued, indicating that investors took gains, although the price remained considerably above its 20-day moving average.

Option traders seem to be buying calls and selling puts, indicating a bullish mood. It should be observed, however, that the share price action leaves more area in the volatility range for a future negative fall in the share price.

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