Microsoft Stock Hasn’t Been This Cheap in Nearly a Decade. Here’s How to Buy the Dip for Less.

The recent AI sell-off is hitting the top tech stocks hard. NVIDIA is down 8% in the last month. Meta? 11%. Google? 7%. And so the same goes for the rest of the "Magnificent 7". 

But out of all of them, I have my eyes on Microsoft (NASDAQ: MSFT). After the recent sell-off, the stock is trading at valuation levels we haven't seen since December 2018, making it one of the cheapest entry points for long-term investors in recent memory.

Yet despite the short-term weakness, Microsoft's long-term AI story remains as strong as ever. The company continues to embed AI across its product lineup, creating new revenue streams while strengthening its competitive moat.

So, it’s no surprise that many investors are taking advantage of this entry opportunity. Most would default to buying as many shares as they can. But what if we could supercharge the purchase? Use a little free leverage to take advantage of the near-term weakness? That's where deep in-the-money LEAPS calls come in. Let’s talk about them. 

What are deep ITM LEAPS calls?

I’ll break down the definition in three parts. 

First, call options are time-bound contracts that give the buyer the right, but not the obligation, to buy an underlying asset at a set strike price on or before the expiration date. The explicit goal of buying a call option is to benefit from the underlying stock’s bullish move, preferably before the contract expires. 

Second, in-the-money (ITM) means that an option has real, or intrinsic, value. For call options, this occurs when the stock is trading above the strike price. For example, if you’re holding a 100-strike call option on a stock that’s currently trading at $150, that means your call option is in the money and has an intrinsic value of $50. 

But remember, options can also have time or extrinsic value, so that 100-strike call won’t necessarily sell for $50. I’ll circle back to that later. 

The last concept to define is LEAPS, or Long-Term Equity Anticipation Securities. These are standard option contracts that expire in one year or more. 

Putting those three together, a deep ITM LEAPS call is a long-term call option with a strike price that is significantly below the current market price of the underlying stock. 

In many ways, it's like renting the stock for a fixed period, say, one to two years, allowing you to participate in much of the upside. And since deep ITM leaps calls are often cheaper than the stock price itself, you don’t have to pay for the full 100 shares outright. This gives you free leverage.

At the same time, deep ITM LEAPS calls also come with less theta, or time decay. For those unfamiliar, theta measures how much value an option loses each day simply because time is passing. That’s the nature of time-bound contracts. 

The 90-delta angle

But how deep in the money should a deep ITM LEAPS call be? 

Well, the answer usually depends not on the difference between the stock and strike price, but on an options metric called delta. 

Delta measures how much an option's price is expected to change for every $1 move in the underlying stock. The higher the delta, the more closely the option’s price tracks the underlying stock’s price movement.

For deep ITM LEAPS calls, many investors prefer deltas of 0.80 or higher. I prefer a 0.90 delta because it almost mirrors the stock price. 

Finding deep ITM LEAPS calls on Microsoft

Let’s go back to Microsoft. Right now, the stock is trading at around $368 a share. 

Wall Street thinks this is quite undervalued. The stock has a high target price of $680 - 85% more than it is today. 

So, how do you find deep ITM LEAPS calls with 90-delta on Microsoft? 

Simple. Head over to Barchart, search for Microsoft, then click Long Call/Put on the left side of the screen. 

Once there, you’ll be brought to the screener results page for long calls and puts. Stay on the Long Call tab, then click on the expiration dropdown and change it to your preferred contract length. In this example, I’ll use September 17, 2027, which is 445 days away. 

Once that’s done, Barchart gives me the contract details for all available long calls that expire on that date. 

Now, the next step is to rearrange the list from highest to lowest delta. Just click the delta heading to do exactly that. And what do you know, the very top result meets my 90-delta criteria. 

So let me break that down. 

Trade breakdown and potential scenarios

According to the screener, you can buy a 225-strike call on Microsoft for $161 per share, or $16,100 per contract. In other words, you can control 100 shares of MSFT for $16,100 vs buying them, which would cost $36,857. The call is 39% in the money and has a delta of 0.8961, which means the call should gain about $0.90 for every $1 increase in Microsoft’s price. This call option gives you stock-like exposure going into the trade. 

Aside from those metrics, you also need to look into the breakeven price, the price level at which you'll neither make nor lose money. 

For this trade, it’s $386. That’s only 5% away. Once Microsoft crosses that line, each additional dollar increases both the intrinsic and extrinsic value of your option. 

And because you have over a year of time value left, Microsoft doesn't need to rally immediately for the trade to work. You have plenty of time for your investment thesis to play out.

39% OTM comparison

Now, let’s quickly compare this to a LEAPS call that’s about 39% out of the money (OTM).

This 515-strike call costs $25.45 per share - significantly less than the 90-delta ITM call. 

However, its breakeven price is $540.45 - 47% away from the current trading price. Point is, OTM LEAPS calls are cheaper, but they require massive upside to just break even. On the other hand, ITM LEAPS calls are more expensive but offer a better chance of turning a profit. 

That’s exactly why many long-term investors prefer deep ITM LEAPS when opening a bullish option position. 

Conclusion

Deep ITM LEAPS calls aren't cheap, but that's precisely the point. Because you’re paying more upfront, you get more benefits like stock-like exposure, reduced theta impact, and a higher probability of profit compared to out-of-the-money contracts. 

So when high-quality companies like Microsoft go on sale, you might want to consider deep ITM LEAPS as your next strategy.