While the tech sector is gradually showing some signs of recovery – especially as the cryptocurrency ecosystem has recently found momentum – skepticism remains a major source of fear. A name that has apparently aroused suspicion is Microsoft Corp (NASDAQ: MSFT). Normally, dips in MSFT stock are seen as a buying opportunity. But with fears that the artificial intelligence bubble will soon burst, market makers appear to be bracing themselves for the pessimism.
How can I be so sure of that? Clearly, I have no idea at all what the market is really thinking. To say otherwise would be the height of unhinged arrogance. But what I can say is that for the 495/500 bull call spread expiring on January 16, 2026, the maximum payout for hitting the second-leg strike ($500) at expiration currently comes in at over 108%.
Nominally, this trade involves traders simultaneously buying the $495 call and selling the $500 call on a single ticket or execution, being charged $240 for the (net) contract. The breakeven threshold is $497.40.
Overall, this trade appears to be quite generous. In short, MSFT stock has 51 calendar days to rise through the $500 strike, which translates to about 2.7%. That seems very doable as the security is up 2% today. Of course, the market is a stochastic, entropic mess – meaning a lot can happen in those 51 days. Still, a 108% payout if there is a move of less than 3% in a top tier tech stock seems attractive.
In my opinion, market makers are putting more weight on the pessimistic story of an AI bubble bursting (particularly by reacting to order flow dynamics). As such, they should boost the bullish position by making upside trades cheaper, attracting offsetting flows to balance the books.
Ultimately, I believe that you should consider making this bet – and I’m going to show you why an options trade makes sense.
Taking the plunge for MSFT stock
When navigating a stochastic, reflexive and ultimately heteroskedastic (i.e. clustered volatility dynamics) environment, it is vital – absolutely essential – that an underlying analytical system or methodology is rigorous enough to accommodate such characteristics. Linear, assumption-based spreadsheet models simply cannot truly represent the stock market.
That’s not a combative statement; it is a structural, mathematical reality.
To better understand the complexity behind MSFT stock (or any other security), we need to think of probability as a physical object rather than an abstract concept. Imagine being tasked with installing a giant TV on your wall. You wouldn’t just put it anywhere. Instead, you would nail the mounting frame into the studs to ensure adequate stability and support.
Similarly, you would apply the trigger strike price or the profitability threshold to the studs of the probabilistic object. You wouldn’t put it on the drywall because the support simply wouldn’t physically exist.
The problem with treating the probability of MSFT stock as a physical object, of course, is that the security’s pricing represents a unique journey through time. Therefore, we need to change our dataset from a continuous, scalar format to a discretized, iterative format. In other words, we take MSFT’s price action and split it into identical moving segments.
Personally, I prefer to use rolling 10-week ranges. The important point is not necessarily the set size, but its consistency in the model.
With these two radical paradigm shifts (reification and iteration), we run the data through a Kolmogorov-Markov framework layered with kernel density estimation (KM-KDE). The idea here is that patterns emerge through multiple iterations. Specifically, we are looking for the golden measure called probability density.
Probability density refers to the price level at which the target security tends to cluster the most over a given period. So if we are logical, we should consider option strategies that give us the best chance of success while providing adequate reward.
What makes MSFT stock so unusual is that under 4-6-D conditions – where the value was up for four weeks and down for six weeks, with an overall downward slope – clustering occurs around $494, as opposed to around $505 under base conditions. That’s a negative variance of 2.18% and normally I wouldn’t entertain such ideas.
However, with the market offering a triple-digit payout for reaching $500 – roughly between these two clusters – the deal is arguably attractive.
Act strictly on the math
As a species, Homo sapiens is genetically wired to recognize patterns in low-dimensional problems. This bias reflects an efficient, evolutionary strategy for survival and cognitive functioning, allowing people to generalize situations from limited samples.
When we encounter high-dimensional stochastic surfaces – like the stock market – we tend to hallucinate structure in noise. That is why technical analysts see cups, handles and sea dragons, among other things. But because every day someone has identified a bullish wedged giraffe on the price charts, at some point one of these wild chart patterns will happen to be prescient.
That is not proof that the methodology works. That’s survival bias.
Instead, the real edge over the market is not found in fundamental or technical analysis, neither of which is actual analysis. Instead, they are infantile, post-hoc rationalizations that are structurally divorced from the mathematical reality of the environment they purport to explain.
If you want to succeed in the Wild West shootout that is the options market, you can’t show up with a butter knife. I’m here to provide you with the very best insight I can give – and even that may not be enough.
Yet I firmly believe that by following the numbers – like what happened recently in Oscar Health Inc (NYSE:OSCR) – you will more often than not come out ahead in the long run.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of the information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are urged not to rely on the opinions or information contained herein and are encouraged to do their own due diligence before making any investment decisions.
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