Most of the Mag 7 traded higher, with Amazon (AMZN), Microsoft (MSFT), Apple (AAPL), and Google (GOOGL) leading. Microsoft (MSFT) rose more than 30% over the past month and was up over 2% in the session, near $515-$516, a 10-month high.
What is driving the move
Fed chair Kevin Walsh's tone raised the odds of a rate hike and pushed money out of small caps into mega-cap tech seen as safer. This was not a full risk-on rally. Software names like Microsoft (MSFT) led while Nvidia (NVDA) and other chip stocks paused.
The rally started with a strong earnings report. The feared problems did not happen. Azure grew 43%, and cloud revenue was strong. The stock jumped on earnings and then climbed further, now above where it closed on earnings day. The broad market rally and the software sector's recovery both helped. Microsoft (MSFT) is the biggest single name in the software sector.
The stock was under $350 at the end of June, so the move to above $515 is a 47.5% gain from those lows. Remaining Performance Obligations grew over 80% year-over-year. Copilot now has over 30 million monthly users and rising. The old worry - whether Microsoft could make money from its AI spending - has faded. The company plans about $190 billion in capex this year, and instead of hurting the stock, that spend became a tailwind because Microsoft grew revenue across all its businesses and beat on the metrics it reported at the last earnings event. Microsoft is one of the software names that has managed to monetize AI.
The concerns
Free cash flow is dipping, and the company had to raise money, so there are worries about free cash flow going forward. Margins took a hit and need to recover back into double-digit growth. On the technical side, the stock looks overbought, with an RSI near 73 (above 70 is considered overbought). After a run this size, a great company can still struggle at times.
Trade one: two-week-wide put calendar (bearish, cautious)
Targets the $500 mark, just below the current price. Buy the September 18th 500 put (monthly, expiring in 21 days, $15 out of the money), sell the September 4th 500 put (weekly, expiring in 7 days). Cost about $3.95 debit, trading closer to $3.50 now after the market recovered slightly. The debit paid is the maximum risk, so $395 per spread.
Because it uses a two-week spread rather than a same-week one, it does not max out at once, and you can extend the duration and chip away at the net debit if the market allows. The position is short about 6.5 delta and long about 19 Vega. You can make money two ways if Microsoft (MSFT) backs off: a directional move down and a rise in implied volatility. Implied volatility has been falling as the stock rallied; a pullback usually lifts implied volatility, which would expand the calendar's price.
The goal is a slow grind down toward $500 over the next three weeks. The profitable range runs from just under $490 up to about $512. Because there are multiple weekly options inside, you can roll the short option each week - buy it back and sell a new weekly one, collecting credits and cutting the net cost. There is assignment risk on the short option over the next seven days. You do not want the stock to keep rising, and you do not want a big drop below 485 or 475. You want a slow move to about $500, the point of peak profit, not a sharp fall.
Trade two: out-of-the-money put vertical (more passive)
For someone who thinks the stock may still rise, hold flat, or dip only a little. Using September 18th monthly options: sell the 500 strike put, buy the 490 strike put ($10 wide). Collect a credit of about $2.30, now maybe a dime to 15 cents below that after the stock ticked higher. The credit brings the break-even down to about $497.70.
Both trades target the $500 level. The risk is the $10 width minus the $2.30 credit, so about $770 risked to make $230. This is a high-probability short put vertical that collects theta and has defined risk. It is profitable in three of the four scenarios; what you do not want is a break below $500. The 500 strike has over a 70% probability of finishing out of the money at expiration.
The tradeoff is clear: you risk $770 to make only $230, but you get a better probability of success over the next three weeks and a small cushion to the downside if you feel you missed the move but still lean bullish or expect the stock to consolidate.
