Smart money makes 'stupid' trade on Microsoft

The smart money is piling into Microsoft ahead of earnings.

Microsoft shares are up more than 19 percent since its Aug. 24 low, and now one trader is betting that the stock could hit a fresh multiyear high by the end of the month.

On Monday, in a colorful strategy that options traders refer to as a "call stupid," one trader bet $2 million that Microsoft could soar above $50 by the end of next week. This is a bullish strategy in which a trader will gain exposure to a stock by getting long two separate options strikes of the same expiration rather than create a spread. The goal is for the stock to rise above the higher strike.

Read MoreMicrosoft has a 'heads you win, tails you win' setup: Technician

In the case of the Microsoft trade, an investor purchased 19,000 of the Oct. 30 weekly 49-strike calls and 19,000 of the Oct. 30 weekly 50-strike calls for a total of 50 cents. Since each call option accounts for 100 shares of stock, this trade is worth nearly $2 million in premium and sees profits if Microsoft rises above $50, or more than 5 percent, by Oct. 30. That puts the stock at its highest level since the dot-com bubble.

"This isn't a strategy that we talk about very often," options expert Mike Khouw told CNBC's "Fast Money" on Monday. "But I think this is a very smart way to make a bullish bet on the stock ahead of earnings." Khouw noted that the Microsoft tends to move an average of 4 percent following earnings. "By buying the 50-strike calls you get a lot more leverage to the upside," added the co-founder of Optimize Advisors.

Microsoft is slated to release its fiscal 2016 first-quarter earnings report Thursday after the closing bell. Analysts surveyed by FactSet are expecting the company to earn 58 cents per share on $20.75 billion in revenue.

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  • Melissa Lee

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

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