Did Unusual Options Activity Predict Microsoft Q3 Earnings Beat?

Did Unusual Options Activity Predict Microsoft Q3 Earnings Beat?

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Prior to Microsoft’s Q3 earnings, the stock market had been sliding for quite some time. While Microsoft had been somewhat resilient to the past week’s macro fall, the stock is still down from its July 52-week high (roughly the area where the market began its recent short-term downtrend) of $366.78 all the way to $330.53, where it closed on Tuesday. 

However, despite the macro headwinds, with a big earnings week in front of us, one “smart money buyer” stepped in to take a big shot on November monthly call options that were far out of the money. 

This trader picked up 12,500 contracts priced between $2.41 and $2.84 (an average price of $2.625) for an eye-watering price tag of $32.8 million dollars — nearly enough to buy Kylie Jenner’s mansion. These options, not for the faint of heart, carried a strike price of $355, more than $20 above Microsoft’s price at the time they were bought. When this trade went out, we alerted Market Rebels immediately. 

How did it go?

We’ll never know if this stock will reverse until the opening bell rings, but based on the earnings result alone, it’s looking like this purchase went very well. After hours, Microsoft shares are up +4.53%, now less than $10 away from this trader’s strike price, with nearly a month remaining to expiration.

Microsoft Q3 Earnings Result

  • Microsoft reported a beat on the top and bottom line, and surprisingly all the other lines.
  • Microsoft Q3 EPS: $2.99 vs $2.65 expected
  • Microsoft Q3 Revenue: $56.52B vs $54.40B expected
  • Microsoft Q3 Revenue Growth: +13% YoY
  • Microsoft Q3 Net Income: $22.29B, +27%
  • Microsoft Q3 Intelligent Cloud: $24.26B in revenue vs $23.49B expected, +19%
  • Microsoft Q3 Azure Revenue: +29% during the quarter vs 26% expected.
  • Microsoft Q3 Productivity and Business Processes Unit: $18.59B in revenue vs $18.19B expected (this unit contains Microsoft 365 subscriptions, LinkedIn, and Dynamics enterprise software)
  • Microsoft Q3 More Personal Computing segment (Windows, Xbox, Bing, Surface): $13.67B vs $12.85B expected, +3%

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Microsoft Q3 quarterly growth showed percentage increases in every single tracked category — Azure & Cloud (+29%), Dynamics (+22%), Office 365 (+18%), Office commercial products (+15%), Office consumer products (+3%), Search + news and advertising (+10%), Server products (+21%), Windows commercial products (+8%), Windows OEM (+4%) and Xbox content & services (+10%).

Thus far, despite the pullback from July, Microsoft is up 38% without counting the after hours move, compared to an S&P 500 that is only up 11% over the same period. 

And as for the options – while these options remain out of the money, these were bought with plenty of time, meaning that IV crush won’t play as much of a factor here if we retain the powerful after hours move. Currently, MSFT’s 30 day IV (a calculation of implied volatility) stands at 29.8 according to Market Chameleon – not far above the 52-week average of 26.9, and well below the 52-week high IV30 of 38.3.

Now it all comes down to the call, and any potential guidance we receive, which is commonly the most important category of all when it comes to stock market earnings. That guidance will come at 5:30 PM EST, when Microsoft CEO Satya Nadella takes the stage to address shareholders about the company.

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