Microsoft Corp. (MSFT), Trending Stock Report

Microsoft Corp. (MSFT) announced earnings yesterday. The company beat earnings estimates. However, the stock is down in pre-open trading because the Azure Cloud Services division missed the growth estimate of 30% by 1%. In pre-open trading the stock has dropped near 3% as of this writing.

Today is Fed Day, and we don’t like to be in high-probability trades on indexes when the Fed Chair is speaking. That said, there are a few compelling reasons why we like the idea of a high-probability trade on MSFT this morning.

First, the volatility expectations one day after MSFT previous earnings reports tends to get crushed by nearly half. Our high probability strategy makes money as volatility expectations fall. Second, the biggest drop for MSFT shares over a 3-day period in the last year was 5.45%. We may be able to sell options at a strike price that is 7.5% out-of-the-money at a price that justifies our risks. Third, MSFT has technical support near 390.

This Volatility Term Structure for MSFT shows us the implied volatility of the at-the-money options for each expiration. To learn more about Volatility Term Structure, click here. You can see that Friday’s expiration has the highest volatility expectations of any term. If MSFT behaves the way it has after previous earnings reports, we can expect Friday’s volatility in this chart to fall from near 75% down into the 30% to 40% range by today’s close. That is good news for option sellers who profit from falling volatility expectations.

This MDM graph compares the modeled expectations of current options prices (the orange line) to the actual movement of MSFT’s price over the past year. You can see that the actual behavior (the blue histogram) shows that MSFT did not fall below support near 390 in percentage terms during the past year. That is also good for our high-probability strategy today.

MSFT announced earnings that beat expectations yesterday. The stock is down because one division missed its revenue forecast by 1%. With the stock dropping near 3% this morning, we may be able to sell out-of-the-money options near technical support in a limited-risk trade for a very nice price and with a high probability of profit.

To get the specific details and prices on today’s trade idea, be sure to read today’s ODDS Online Daily Option Trade Idea.