Three Big Reasons Why Microsoft May Be Poised For A Pounding


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Three Big Reasons Why Microsoft May Be Poised For A Pounding

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The best way to play probabilistic pullbacks in MSFT is with cheap puts.

Microsoft (MSFT) is one of two American companies with a market capitalization of over $2 trillion. MSFT shares are up more than 30% over the past few months after hitting a recent low near $220 on January 6th.


However, the recent red-hot rally is finally starting to slow down. “Sell in May and go” applies to Microsoft as a monthly stock return. were negative on average. over the past 5 years.

In addition to the recent sharp drop, there are three other very good reasons to be somewhat skeptical about the continued solid growth of MSFT shares in the coming weeks, as well as the best way to play.



Microsoft is beginning to weaken after failing to reach new recent highs above $294. The stock reached overbought on both the 9-day RSI and the Bollinger B percentage before softening. MSFT is trading at a large premium to the 20-day moving average, which has led to pullbacks to it in the past. MACD has just generated a sell signal.

MSFT shares also look a little overpriced on a comparative basis. Currently, Microsoft is showing a slight increase over the past 12 months, while the NASDAQ 100 (QQQ) is still down over 7% over this time period. Usually MSFT and QQQ tend to work in tandem, which makes sense given that Microsoft is the biggest weight in the NASDAQ 100 ETF by 12.68%.

msft qqq


The performance difference between MSFT and QQQ has reached its limit again.

Expect Microsoft to come back and fall far behind in the coming weeks, as it has done in the past.


The current price/earnings (P/E) ratio has returned more than 30 times and reached the highest value in the last year. The last time it hit a 30x gain in August, it was a significant high for Microsoft stock.


msft pe ratio 2023

This is also well above the average P/E multiple of 27.72 in this time frame. Similar growth was seen in other traditional valuation metrics such as price/sales and price/free cash flow.

It is important to remember that interest rates have risen sharply over the last 12 months. This would normally have had a noticeable dampening effect on stock valuation multiples. This makes the recent increase in MSFT multiples even more noticeable.

Also, a $2 trillion company with these types of multiples makes it difficult for future growth rates to justify those high multiples simply because of the law of large numbers.

Implied Volatility

Implied volatility (IV) has dropped sharply over the past month in MSFT options. It is now at its lowest level since February and is approaching the annual low of August last year.

msft iv

Notice how the lows in IV almost exactly match the recent highs in Microsoft stock prices. Implied volatility can be a valuable tool for timing market entry.

Implied volatility is just another way of telling the price of options. A comparative analysis of about a year ago will help shed light.

Below are the montage options for June options issued last Friday, April 14, and one year ago, April 20, 2022. As an example, we use $285 in-the-money June puts.


Comparing the two:

  • The share price was almost the same – $286.14 on Friday and $286.36 a year ago on April 20. Thus, the share price on Friday is slightly lower.
  • The days to expiration (DTE) were the same – 63 days from Friday and 58 days from 12 months ago. Thus, there are still 5 days left until the expiration date on Friday.

All other things being equal, the $285 June puts from Friday should be slightly more expensive than the $285 June puts from a year ago, as the share price is lower and there is more time to expiration.

But it’s not like that – the IW is now much lower (26.80) than a year ago (33.07). This much lower IV makes the current $285 June puts more than $2.00 cheaper than last year’s $285 puts.

The table below puts it all together.


The % column simply takes the option price divided by the stock price to create another useful comparison. The $285 June puts are now less than 4% of the share price, while the same puts would have been worth more than 4.5% then.

Microsoft is technically overbought and fundamentally overpriced. Low implied volatility (IV) is another reason to be bearish. Low IV levels also mean that option prices are lower.

Investors looking to hedge or traders looking to speculate can certainly sell MSFT shares short. But it can be expensive and risky.

Given the current situation, it might be better to consider buying some risk puts from Microsoft. It hasn’t fallen in price for a long time, and losses are limited to the value of the option, which, as we have just seen, is less than 4% of the value of the share.

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What to do next?

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All the best!

Tim Biggum

POWR Options Newsletter Editor

MSFT shares closed Friday at $286.14, down $3.70 (-1.28%). MSFT is up 19.61% year-to-date, compared to the 8.26% gain in the benchmark S&P 500 over the same period.

About the author: Tim Biggham

Tim Biggam

Tim spent 13 years as a chief options strategist at Man Securities in Chicago, 4 years as a lead options strategist at ThinkorSwim and 3 years as a market maker at First Options in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to TD Ameritrade Network’s “Morning Trade Live”. His main passion is to make the complex world of options more understandable and therefore more useful for the everyday trader. Tim – editor Power Options Newsletter. Learn more about Tim’s past, as well as links to his latest articles.


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