![Use options to manage risk heading into Microsoft earnings next week](https://news7g.com/wp-content/uploads/2024/07/108009224-1721411919273-gettyimages-2162030724-ag_outage_05-780x470.jpeg)
Heading into earnings next week, Microsoft is positioned to continue to capitalize on growing demand for its AI and cloud computing services, highlighted by the cloud revenue growth Alphabet reported this week. The company’s leadership in AI and cloud computing makes this an attractive earnings trade for next week. The recent pullback to key support and recent outperformance present an attractive risk/reward opportunity to add additional upside exposure ahead of the report. MSFT recently pulled back to significant support at $430, which has previously acted as resistance. This pullback presents a favorable entry point with reduced downside risk after bouncing off that level this week. Microsoft’s relative strength versus the S&P 500 and momentum also point positively to earnings. From a valuation standpoint, MSFT trades at 32 times expected earnings, which is 50% higher than the average S&P 500 stock. However, this valuation is reasonable given MSFT’s industry-leading profit margins and expected earnings per share growth of 16% and revenue growth of 15%, driven by the company’s strong presence in AI and cloud computing. The industry-leading net profit margin of 36% reflects both highly efficient operations and high returns on revenue. The Trade To capitalize on the bullish outlook for MSFT ahead of earnings, I’m looking to sell the Aug. 30 Vertical Put, $445/$425 for a $7.50 credit. This includes: Sell August 30 $445 Put at $14.18 Buy August 30 $425 Put at $6.68 Using a vertical put spread allows us to benefit from the expected strength in MSFT while managing risk. The total potential profit for this trade is $750 per contract if MSFT is above $445 at expiration, and the maximum risk is $1,250 per contract if MSFT falls below $425 at expiration. The breakeven price for this trade is $437.50, providing a downside cushion of 1.6% from the current price. DISCLOSURE: Zhang has a long position in MSFT. All opinions expressed by CNBC Pro contributors are solely their own and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent companies or their affiliates and may have been previously disseminated by them on television, radio, the internet or other media. THE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND OUR PRIVACY POLICY. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO PURCHASE ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS OF A GENERAL NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE CIRCUMSTANCES. THE CONTENT MAY NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISION, YOU SHOULD CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here to view the full disclosure statement