A High-Risk Option Play on Microsoft

by Michael Shulman | July 19, 2012 7:00 am

Microsoft (NASDAQ:MSFT[1]) earnings are due out after the market close on Thursday (7/19).

Do you have the risk capital to take a very high-risk position on the stock? Would you want to do a split position and also sell an option on a winning company like Apple (NASDAQ:AAPL[2]) to provide the capital you need to buy a MSFT put?

If you do, here we go.

Microsoft, as a company, is going nowhere fast. It lives off an installed base that is very slowly but also very definitely shrinking, that base being eaten away by Apple tablets, Apple laptops and to a much more limited extent, Apple desktops.

This is especially true for the consumer marketplace but the iPad has crossed the Microsoft moat in many corporations. I believe analysts accept some but not all of this and are wondering how the European recession, the U.S. slowdown and Apple is hurting sales.

And therefore I believe earnings and the company forecast will disappoint analysts and traders this Thursday. Technically, Microsoft stock is trading off its highs near $32 and has not been able to get back above $30. So, take a look at the July $30 puts and if you are really a buccaneer, something out of the money like the $29 puts.

Pay for this — maybe — by selling some Apple puts. The Apple July $600 put sells for around two bucks — $200 a contract. Who would not want to own AAPL at $600 — I have put positions at strikes higher than that, I write puts on fair prices and AAPL at $600 is cheaper than cheap.

Anyway, sell some Apple put contracts and you have a bit of cash to buy some MSFT puts. Or if supporting an Apple put is too expensive — at $600 that means $60,000 in capital to support a contract — look at SanDisk (NASDAQ:SNDK[3]).

SanDisk makes the kind of chips that go into iPhones and iPads, and the puts are very rich in premium; as I write this a put that expires in three days will return 3% to you if it expires worthless. There is one big caveat — its earnings also come out on July 19. The stock has been hammered this year. I think it will surprise some people. You will see some short covering and you will get a pop in the stock.

Think about it.

Michael Shulman is editor of Options Income Blue Print[4]. Learn more about trading weekly options in this free short video[5].

For purposes of disclosure, Michael Shulman owns shares of the AAPL.

Source URL: https://investorplace.com/2012/07/a-high-risk-play-on-microsoft-aapl-msft-sndk/

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