Getting bullish on Microsoft ahead of earnings

Options Action: More upside for MSFT?
Options Action: More upside for MSFT?   

Last time Microsoft reported earnings, the stock had its biggest one-day plunge in over 18 months. But as the tech giant gears up to report results on Thursday, some are betting that the worst is behind it.

On Monday, when options volume was about 2½ times its daily average, a trader made a very large purchase of call options expiring in May. Specifically, the trader bought 25,000 contracts of the May 44-strike calls for 47 cents each.

But according to Dan Nathan, co-founder of RiskReversal.com, there's more than meets the eye on this particular trade.

"These were marked closing," said Nathan, who noted that the trader was getting out of an existing position, not taking on a new bet. When traders buy calls, they are making bullish bets. But when they sell calls short, they are taking a bearish position.

Read MoreYahoo, Microsoft add termination clause in search deal - filing

Microsoft Corp.
Fred Dufour | Getty Images

According to Nathan's analysis, the trader likely closed those calls in anticipation that the stock could rally, which would incur financial losses to anyone short calls.

Technical analysis may also have had a hand in how the trader is now positioned. When the stock sold off three months ago, its chart made a gap from its Jan. 26 low of $46.24 to its Jan. 27 high of $43.20.

Shares subsequently bounced from support around the $40 level. Nathan speculates that the trader is expecting Microsoft stock to make the classic technical move of "filling the gap" it made in January. In other words, one options trader is betting Microsoft might reclaim all its post-earnings losses.

"The gap from earnings back in January was 9 percent," said Nathan. "It was an eye-popping move. So possibly this long holder who covered those calls does not want to cap their upside into Thursday's earnings."

Contact Options Action

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.