MSFT Upcoming Earnings and Option Straddle Price
As we approach Microsoft’s earnings release on April 25, 2024, after the market closes, the trading community is observing the options market for clues about expected stock movements. With just one day left, the current options straddle implies a move of 4.4% in either direction. But how does this compare to historical movements and previous straddles? Let's examine the historical data.
Microsoft’s Historical Pre-Earnings Straddle
Source: Market Chameleon
Historically, the average value of Microsoft's pre-earnings straddle at the market close, just before earnings, has been around 4.4% of the spot price. This aligns precisely with the current straddle price, suggesting a normal market expectation as we head into the earnings announcement. Looking specifically at third-quarter earnings, the average historical straddle price has been slightly lower at 4.2%.
Historical MSFT Pre-Earnings Option Straddle Price
The historical range for these straddles has been quite broad, stretching from 7.1% to 2.6%. This high variance indicates that while the current straddle is priced at its average, there's historically been significant fluctuation in how much the market expects the stock to move.
Historical Stock Movements on Earnings Days
Source: Market Chameleon
On average, Microsoft’s stock has moved either up or down by about 3.6% to 3.9% during Q3 earnings days. This suggests that the option straddles have slightly overestimated the potential movements, which could be an important consideration for traders thinking about entering a straddle position now.
Historical MSFT Earnings Stock Movement
Performance of the Earnings Straddle
Source: Market Chameleon
Analyzing the one-day straddle performance over earnings reveals an average return of -7.4%, with a win rate of only 33%. This performance metric suggests that the market tends to overestimate Microsoft's actual earnings day movements. Notably, Q3 earnings have shown slightly positive returns on occasion, influenced by a significant outlier move in 2015. Without such outliers, the general trend indicates more muted actual stock movements compared to the expectations set by option premiums.
Historical MSFT Earnings Option Straddle Performance
Conclusion
The current pricing of Microsoft’s earnings straddle seems attractive, as it is aligned with historical averages, with a full day of trading ahead suggesting minimal potential decay in value. However, history shows that holding a long straddle into the day after earnings might not be the most lucrative strategy, given that actual stock movements have generally been less volatile than the premiums implied.
Investors and traders should weigh these factors carefully. The historical data presents a case where the straddle tends to overestimate movement, which might caution against expecting large earnings-related price swings. As always, market conditions can change, and past performance is not always indicative of future results. Stay tuned, and trade wisely.
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