Microsoft today announced that it is rolling out optional two-factor authentication to the 700 million or so Microsoft Account users, confirming last week's rumors. The scheme will become available to all users "in the next few days."
It works essentially identically to existing schemes already available for Google accounts. Two-factor authentication augments a password with a one-time code that's delivered either by text message or generated in an authentication app.
Computers that you trust will be allowed to skip the two factors and just use a password, and application-specific passwords can be generated for interoperating with software that doesn't support two-factor authentication.