Microsoft traded lower, pulled down by a broad selloff in software stocks. The trigger was IBM's preliminary earnings, which disappointed investors and raised worry about how much companies are spending on enterprise software.
Two other things kept Microsoft in focus. Bloomberg reported it is more and more replacing OpenAI and Anthropic models with its own in-house tech, a move meant to cut costs and depend less on those outside models. Microsoft also announced thousands of layoffs, including from Xbox, as it shifts money and people toward AI. The next big event is its quarterly earnings on July 29th, with Wall Street expecting more AI-driven growth.
The state of the stock
Microsoft sits in a "show me" period: show what the AI spending is doing, show how it will make money from it. The plan to shift some of the spend away from Anthropic and OpenAI toward its own internally built MAI models is worth watching, and the earnings call should give a clearer picture of what that spending looks like.
The stock is being punished for being part of the software group. It is down 20% year to date and about 33% off its 52-week high near $550. It hit $555, sold off hard, dropped to $378 during the session, then already rallied off that low. If the selloff is overdone and Microsoft is being unfairly punished, this could be a decent entry point.
The key question traders and hedge funds are asking: is the weakness an IBM problem or a software problem? Software had been heavy but was holding and bouncing over recent days, helped by a rotation of selling memory stocks and buying software. That reversed. Microsoft, Oracle, Salesforce, ServiceNow, and Adobe all traded red, while Palantir looked like it was turning positive. The market is trying to work out whether IBM's trouble spreads across the industry; the wider software drop was real but far less severe than IBM's.
Microsoft keeps moving along a consistent path: bringing more AI in-house, cutting Xbox staff, shifting assets toward AI. It has a broad portfolio of products, so it does not depend fully on AI or on the parts of the US economy getting hit. Three price targets were raised this week, from Argus, Capital, and Wolfe Research, all above $500. No one is willing to lower targets on Microsoft. The stock has stayed heavy and has not bounced much off its lows, so the earnings report in a couple of weeks should bring a lot of new information.
Both example trades came out bullish, which fits a view that is close to consensus. Microsoft's year of struggle has been a head-scratcher given how deeply built into companies its enterprise products are.
Trade one: put-financed call spread, dodging earnings
The first trade avoids the July 29th earnings by using a weekly option that expires July 27th. It sells a cash-secured put to pay for buying a vertical call spread, so the position is mildly bullish. The setup: sell the 375-strike put, and buy the 390/405 call spread. This can usually be done for about even money, roughly even to a nickel; right now it can be put on for a small credit, since the stock drifted back and the put caught more bid.
Two reasons drive this structure. Implied volatility is high, with the IV rank around the 90th percentile, so you get good value for selling premium. The skew also helps: out-of-the-money calls are well bid with lots of buyers, while at-the-money options carry relatively lower implied volatility. Buying an at-the-money call and selling a further out-of-the-money call, around 5% to 10% out, makes the vertical spread cheaper. Selling the put finances that cheaper spread for about even money. This pulls the break-even down to the short-put strike of 375 and gives upside up to about 405. Plain put selling only earns the credit; this version also lets you share in a rally.
The direction gets set first, here bullish, then the cash-secured put finances the call vertical. Done for unchanged or a small credit, it costs no capital, only margin, and that margin is significant on a stock trading around $370 to $385. The risk is understood: 375 may simply be where you would want to buy the stock anyway if it drops, and the trade stays ahead of the earnings report.
Trade two: unbalanced call butterfly through earnings
The second trade goes right into the earnings event. It uses the July 31st expiration, just after the July 29th report, where the expected move is around $35. The structure is an unbalanced call butterfly: buy the 385 call, sell two of the 420 calls (385 plus the $35 expected move), and buy one 430 call. That combines a $35-wide long call vertical with a $10-wide short call vertical.
It was put on around $10 and now trades about 20 cents lower, near $980, so about $9.80. For roughly $10 you buy a $35 call vertical that pays off strongly if the stock moves toward the 420 strike. If it runs past 420 or 430, on a big event or a pre-earnings rally, the position stays profitable, because you are long a $35 spread and short only a $10 spread, keeping gains alive above those levels and into the future.
This trade is liked even better than the first. After a required $10 move and paying the debit up front, it offers far more upside. It costs little, and because you pay a debit rather than sell a put, it carries no margin cost, unlike the first trade. If you expect upside up to the 420 to 430 area, it can be a good trade.
