Investors have been trading an unusually large volume of out-of-the-money Microsoft Corp. (MSFT) call options expiring in 74 days. That's a huge bullish signal on MSFT stock, coming after its strong Q2 free cash flow (FCF)results were released after the market closed on Wednesday, July 29.
MSFT is up over 5% today at $488.51, after it rose 19% after the earnings release.
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MSFT stock - last 3 months - Barchart - Aug. 3, 2026 What May Be Pushing MSFT Higher
I discussed its FCF and valuation in a Barchart article on Friday, “Microsoft Jumps 15% on Strong Free Cash Flow - What's the Best MSFT Play Now?”
Based on an operating cash flow margin of 61.6%, I showed it could generate between $65.3 billion and $78 billion in FCF. Using a 2.0% FCF yield valuation metric, Microsoft's fair market value (FMV) could be worth between $3.25 trillion and $3.9 trillion.
That compares with its market cap today of $3.631 trillion, according to Yahoo! Finance. At the high end, then, MSFT could be worth +7.4% more, or $525 per share.
Moreover, analysts have higher price targets: $563.05 (Yahoo! Finance), up from $555.77 last week, when I wrote my Barchart article, and Barchart's $547.45 mean survey price target (up from $544.31 last week).
Including AnaChart's $556.93 from 29 analysts, these three surveys average $555.81, or +13.8% higher than today's price.
So, no wonder investors are piling into out-of-the-money call options. They expect to see MSFT stock move significantly higher.
Unusual MSFT Call Options Activity
This is seen in today's Barchart Unusual Stock Options Activity Report. It shows that over 100x the prior number of call options have traded at the $510 call option strike price (Oct. 16 expiry).
MSFT calls expiring Oct. 16 - Barchart Unusual Stock Options Activity Report - Aug. 3, 2026 That is 74 days to expiry (DTE) for a strike that is over 4.0% higher than today's trading price. In other words, call option buyers expect to see MSFT rise over $510.
They have been willing to pay $17.92 for these calls, i.e., making their breakeven point $527.92.
They may believe, as other analysts do, that MSFT is worth over $555.81 per share, or $27.89 more. That means their investment could theoretically be worth 156% more:
$555.81-$510.00 = $45.81
$45.81 /$17.92 cost = 2.556 -1 = 156% potential profit
Moreover, if they exercise the calls at $510, assuming the stock is worth $555.81, even though their breakeven point is $527.92, they will have an unrealized profit of 5.29%.
In addition, short sellers of these calls have an immediate yield of 3.67% (i.e., $17.92/$488.51). Moreover, if they do this on a covered call basis, the potential upside is 8.067% (i.e., $527.92/$488.51-1).
The bottom line is that both of these transactions, from either the buyers or sellers, imply that they are bullish on MSFT stock over the next 2 and half months.
Investors should be careful in copying either of these trades, though, as there could be downside risks if MSFT falls after today.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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