Microsoft shares might be rangebound. Here's how you can still make money

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The beauty of trading options is you can make money if a stock goes up, down or nothing at all. Shares of Microsoft are presenting such an opportunity right now.  

Microsoft's volatility, a measure of how expensive its options are, has been building over the last several days. That increase is presenting an interesting opportunity for options traders well before earnings. 

Rising Treasury yields and oil prices have kept implied volatility elevated across the Magnificent Seven. However, Microsoft has been subject to its own unique catalysts, such as last Friday's announcement of a significant Copilot overhaul. Microsoft's overhaul, seeking to compete with Anthropic's Claude by unifying chat, coding, and autonomous agent tools into a single app, sent shares surging nearly 3.7% on the news and pushed Microsoft to the highest close of this year.

Microsoft, YTD

This continued to drive up Microsoft's implied volatility, which now sits in the upper 60^thpercentile of its annual range, meaningfully elevated and higher than the majority of the Magnificent Seven. 

This elevated volatility is notable because it's building well ahead of the company's next earnings report. Higher implied volatility carries richer premiums, meaning that premium sellers can collect more money and potentially capitalize on a moderate volatility contraction before the next catalyst arrives. 

The trade: Iron condor

I'm selling the Oct 16 485/475 put spread and the Oct 16 535/545 call spread for a total credit of roughly $2.99.

This trade set-up is a short iron condor. This is a neutral strategy which reaches the maximum profit of $299 if Microsoft's stock remains above the $485-strike put and below the $535-strike call by October 16^th. 

The neutral structure reflects two factors: the Copilot catalyst has already been priced in, and Microsoft has traded largely sideways for most of September. The $485 put sits just below the stock's monthly low, while the $535 call sits more than $15 above the post-Copilot high. This gives the position room on both sides of the range Microsoft has established this month. The goal in this structure is simple: you want the stock to stay below the strike of the call you sold and above the put that you sold by expirations. In other words, you're playing for a flat stock price  

With breakeven stock prices of $538 to the upside and $482 to the downside, the real danger of the trade is a move beyond either long strike before expiration. The estimated maximum loss of $701 is reached if Microsoft has moved above $545 or below $475, roughly 7% from Monday's close, within the next 17 days. The tradeoff for assuming this risk is a theoretical probability of profit of 63% for this position.

Additionally, the "P50," or theoretical probability of collecting half the max profit, is 73%. This supports treating this trade as a candidate for early management rather than holding to expiration, locking in ~$150 when the profit becomes available. Additionally, if Microsoft trades through $485 before expiration, the short put can be assigned, meaning an obligation to buy 100 shares at that price. Once the $2.99 credit is factored in, the effective cost basis drops to $482.01, or around 7.2% below yearly highs. Owning these shares just below pre-announcement prices may be a comfortable outcome for some traders. With the Copilot news already priced in, the next major known catalyst taking place weeks after the October 16^thcontracts expire, and volatility elevated well ahead of earnings, the trade is built to profit from time and premium decay rather than a specific direction.

Disclosures: Spina owns this trade.

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