A slightly bullish strangle play in Microsoft (NASDAQ:MSFT)

Although Microsoft (NASDAQ: MSFT ) shares have given back about 20% of their value since late April, one option investor is willing to bet that the stock's price action will be less dramatic over the next few months. In fact, options volume today suggests the opinion that MSFT could recover a bit of these losses over the short term and settle in between the 25 and 28 levels.

MSFT shares are slightly underperforming the broader market today, down 0.6% at $24.84 compared to the S&P 500, which is a notch above breakeven after a rocky start. There is no real news moving MSFT today, but the tech sector is busy following earnings from Research in Motion (NASDAQ: RIMM ) and Oracle Corp. (NASDAQ: ORCL ) , stocks that are seeing opposite reactions in today's trading.

At 10:03 a.m. EST, blocks of 12,800 contracts traded on the October 25 put and the October 28 call. These strangles were sold to open for $2.17 a piece (the 25 put traded for $1.70 while the 28 call traded for $0.47). This strangle is slightly out of the ordinary as it involves an out-of-the-money call (which is typical) and a slightly in-the-money put (which is not typical). Traditional strangles are comprised of two out-of-the-money options. Since the maximum profit is achieved in a range between 25 and 28, this strangle will be most successful if MSFT rallies slightly to bring the put contract out-of-the-money. If MSFT is trading between the two strike prices at expiration, the maximum potential profit is $2.17 per strangle, a total of $2.77 million for this 12,800-lot.

The maximum loss, meanwhile, is unlimited if MSFT rallies above the upper breakeven of $30.17 and significant if the stock drops below the lower breakeven price of $22.83. Technically, the maximum loss is capped at $22.83 ($29.22 million for this lot), as a stock cannot trade lower than zero. Below is a profit/loss chart I created in my

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The $2.17 premium translates to an implied volatility of roughly 27.5% for this strangle. This implied volatility level compares to the stock's 30-day historical volatility of almost 32%. Short strangles are one way investors collect premium, in lieu of just buying or selling the shares. In this example, the investor is betting MSFT shares are going to edge higher and stabilize, settling in around a range and not returning to its April highs near the 30 mark. If implied volatility does retreat prior to October expiration, the investor could buy back the short strangle at that time.

Microsoft earnings are confirmed to be July 22 after the close (after July options expire). Analysts are expecting per-share results of 46 cents, a dime better than year-ago earnings. Last quarter, MSFT topped the consensus view by three cents per share and exceeded analysts' expectations for revenue. One possible motivation for a bullish strangle such as this is to look at the results from Oracle today. Results impressed Wall Street and the shares have rallied today. If MSFT investors feel that ORCL bodes well for big-cap tech earnings, then this strangle could prove to be a winner.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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