Trader hedges bet against Microsoft into earnings—here's how

VIDEO3:5803:58
How options trader is playing Microsoft's implied move after earnings

Microsoft's stock could be headed for a glitch.

That's at least according to one mystery trader who made a bearish trade in the name ahead of its earnings report after the bell Thursday, buying $136-strike put options expiring on July 26 for $2.12.

As of Wednesday, when the trade was place, it represented a bet that shares of the largest public company in the world would fall about 3% after the release, in line with the average 2.9% move Microsoft has seen following its last eight earnings reports.

And, if you ask options expert Michael Khouw, co-founder and chief strategist at Optimize Advisors, it could simply be a bet against the bulls.

"It could indeed be a hedge against somebody who has a long position in the stock," he said Wednesday on CNBC's "Options Action." "Obviously, over [the] last eight quarters, the stock has rallied considerably, up about 80%."

Given that rally, it might even benefit the bulls to put on a similar trade, Brian Kelly, founder and CEO of BKCM, said in the same "Options Action" segment.

"We [always] talk about ... protecting your portfolio when the volatility is low," Kelly said. "This trade that Mike pointed out, to me, is the perfect trade if you're long Microsoft. Protect yourself."

Another way to trade Microsoft's impending report is to not trade it at all, said Steve Grasso, managing director of institutional trading at Stuart Frankel.

"This is a stock that's done everything right … and I would not be a buyer of it at these levels," he also said on "Options Action." "It's up 34% year to date. It's butting up against hardcore resistance. I'd rather see it break through $140 and be a buyer above $140 and use $140 as your support versus buying it ahead here and having it collapse, as Mike Khouw said, and be down 3 or 4% instantly."

Others, like Strategic Wealth Partners President and CEO Mark Tepper, were content to keep their bullish streak going in the stock of the $1 trillion company.

"Love the stock. Own it," Tepper said in the same "Options Action" segment. "When I look at Microsoft, what I see is they have a very, very unique value prop when it comes to the cloud. So, they have this hybrid cloud offering, which is good for all those businesses who, over the last decade or so, invested very heavily into internal IT infrastructure and they're not just automatically going to get rid of that and move to the cloud. So, they really bridge the gap and I think they have a unique value prop there."

Shares of Microsoft were down slightly in midday trading Thursday.

Disclaimer