Microsoft shares are surging. Here’s how to still make money, says Mike Khouw

Following Microsoft's (MSFT) Q4 earnings and record-setting appreciation ($450 billion in market capitalization gained in a single trading day!), the immediate binary event risk is officially behind us.

Despite the surrounding noise regarding elevated AI capital expenditure, the fundamental engine of the business remains fully intact, presenting an exceptionally high-probability income trade: selling the August 21st weekly $ 412.50/$485 short strangle.

Microsoft, YTD Trade Highlights: Collects $7.30/share ($730 per strangle) Standstill Yield ~1.6% in 21 Days (28% Ann.) The short strikes (out goalposts) are structured at immediate structural support and resistance levels.

Downside Support ($412.50 Put): It is highly improbable for the stock to gap down to the pre-earnings price. Selling the $412.50 put provides a generous buffer, establishing a net break-even of $405.20 ($412.50 - $7.30 credit).

Now selling that put will tie up some cash, but no more so than simply buying the stock.

Upside Resistance ($485 Call): On the upside, the $485 call sits comfortably above immediate resistance, requiring a sustained post-earnings rally of over 8.5% in 21 days to put the position in jeopardy. That also happens to be the level from which Microsoft fell sharply in late January. By initiating this trade post-earnings, you capture a $7.30 combined premium ($3.80 on the call leg, $3.50 on the put leg).

This works out to a 21-day absolute return/yield of ~1.6% relative to the current spot price of the stock. That works out to an annualized rate of return of ~28%, powered by accelerated post-earnings IV crush and steepening time decay into the 21-day to expiration. Important caveat here. Unless this trade is done against an existing long position, you could face in theory unlimited losses as being short that call is effectively the same as being short the stock. But the odds of Microsoft doubling between now and expiration are quite low.

The primary advantage of selling this strangle lies in the worst-case assignment scenarios, both of which align with an acceptable position. If you are assigned on the Put Side ($412.50): You acquire shares of one of the world's most pristine balance sheets at an effective cost basis of $405.20—a steep discount to current trading levels and where it was trading before the surprisingly good earnings were reported.

If you're assigned on the Call Side ($485.00), you'll initiate a short position (or trim an existing long position) at an effective price of $492.30, capturing a material premium over current post-earnings trading ranges.

At ~22.6x forward earnings, Microsoft sits at the virtual midpoint of its 20-year valuation range. For a mega-cap tech compounder delivering mid-teens revenue growth and dominant enterprise cloud positioning, this multiple acts as a fundamental floor. The current valuation does not justify either a sustained breakdown or compelling reasons for a sustained breakout, offering an ideal setup for defined-duration short volatility strategies.

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