Buying Fear: Our Microsoft LEAPS Trade Into July Earnings

The setup

By mid-2026, Microsoft had become one of the most hated names among the mega-caps. The stock plunged 23% in the first quarter, a steeper drop than any of its tech peers. That was its worst quarter on Wall Street since the 2008 financial crisis. The selling kept going into summer, and shares hit a 52-week low of $349.20 in late June. Microsoft closes worst quarter on Wall Street since 2008 on AI concerns: 'Redmond is in a pickle' +2

The reasons were familiar. Investors were anxious about the $190 billion fiscal 2026 capital expenditure guidance and worried that AI would disrupt Microsoft's core software business rather than strengthen it. Tradingkey. We looked at the same facts and reached the opposite conclusion.

The valuation case

The multiple told the story. Shares traded below 20 times expected earnings over the next 12 months, the lowest multiple since June 2016, and for the first time since 2015 the stock briefly traded at a discount to the S&P 500. For context, the stock has historically traded at about 30 times forward earnings. 24/7 Wall St.FinanceBuzz

The business hadn't gotten worse. The market was applying a capital-intensive-hardware multiple to a business still earning software-grade margins, with a 68% gross margin and a 46.8% EBIT margin. One of the highest-quality companies in the world was priced like an average one. TIKR

The growth case

Valuation alone wasn't the thesis. What mattered was that Microsoft is positioned to be one of the main vehicles for enterprise AI adoption.

Most AI companies still have to find customers. Microsoft already has them. Azure, Office, Windows, GitHub, Dynamics and Teams sit inside most of the world's enterprises, with decades of trust, contracts and integration behind them. Rolling out AI at scale doesn't depend on winning new logos. It depends on upselling a customer base Microsoft already owns. We believed the upcoming report would show that flywheel turning, and that the market was pricing in almost none of it.

Why we held through earnings

Holding a position through an earnings report is usually a coin flip. This time we believed the odds were skewed in our favor. Valuation was at a decade low, sentiment was washed out, and growth was accelerating. A good report had room to re-rate the stock sharply. A bad one would land on a stock that had already been punished for most of the year.

The structure: LEAPS over shares

We bought June 2028 call options at a $400 strike, with the stock near $380, a few weeks before the July 29 report.

We chose LEAPS over shares for three reasons.

Capital efficiency. One hundred shares at $380 would tie up $38,000. A long-dated call gives similar upside exposure for a fraction of that. The capital committed to the position stays small, and the rest stays free for other opportunities.

Minimal time decay. Options lose value as expiration approaches, and the decay speeds up in the final months. With nearly two years until expiry, daily decay was small. A short-dated option would have been a bet on timing. A 2028 LEAPS was a bet on the thesis, and that's the bet we wanted.

Defined risk. The most we could lose was the premium paid, and we knew that number on day one. There were no margin calls and no forced selling if the report disappointed.

What happened

Microsoft's July 29 report covered the June quarter, which Microsoft counts as fiscal Q4 2026 because its fiscal year ends in June. It answered the market's biggest question. Adjusted EPS came in at $4.74 against $4.24 expected, on revenue of $90.01 billion versus $87.62 billion expected. Azure growth accelerated to 43%, with guidance for 45% in the current quarter, and Microsoft 365 Copilot seats rose above 30 million. The contracted backlog jumped by $51 billion in a single quarter, from $627 billion to $678 billion. Microsoft (MSFT) Q4 earnings report 2026 +2

The market responded. Microsoft surged 15.5%, the largest single-day market-value increase in stock market history. The rally kept going and peaked with the year's closing high of $513.53 on August 28. Yahoo FinanceVaaSBlock

From our entry near $380, the stock rose roughly 35%. Because LEAPS move with leverage to the underlying, the position returned over 100%.

The takeaways

This trade reflects how we approach markets. We look for high-quality businesses the market is mispricing out of fear. We check whether the fundamentals support the fear or contradict it. Then we pick the structure that gives the most exposure to the thesis for the least capital at risk.

The fear around Microsoft was about spending, while the fundamentals showed growth. When a decade-low valuation lines up with an accelerating business, we want exposure, and we want it structured efficiently.

For informational purposes only; not investment advice.