Microsoft Corporation (MSFT) has been a proven performer for decades, but while the company has solid management, MSFT occasionally lacks pizzazz.
I have an idea for a pair trade today that is merely intended to profit off mid-term price action in MSFT stock, and not a statement about the worth of Microsoft itself.
Microsoft stock broke down in late April but it has since recovered to about the same level from which it fell. The recovery path could be interpreted as a potentially bullish pattern. If MSFT stock continues past the $52.70 area, it could invite more momentum buyers.
I personally am more bearish than bullish on the markets in general from these levels. We are so close to all-time highs, but we’re there with deteriorating fundamentals. I fail to see the catalysts that deserve taking us to new highs without a change in fundamentals or new quantitative easing. The problem? MSFT will need the markets’ help to run much further. So, in the absence of positive catalysts, the tendency will be to slide lower.
If markets stall, I see a potential for MSFT stock to retest lows around $50 to $51 per share. It’s a move I want to capture … but with no out-of-pocket cost.
One final note: I don’t necessarily see a doomsday scenario for Microsoft, I just think it could correct a little from here.
Trading Microsoft (MSFT) Stock
Trade #1 – The short: Buy the MSFT Jul $50 put for 59 cents per contract. This is my maximum loss. I stand to profit if MSFT stock falls in the next 46 days. The faster and deeper Microsoft falls, the faster and bigger my profits would be.
I am a conservative fundamental trader, so I always aim to limit my exposure. In this case, I want to eliminate my out-of-pocket expense for the trade above. I can do this by cautiously selling MSFT puts to finance the first trade.
Trade #2 – The bank: Sell the MSFT Jan 2017 $40 put for 74 cents. Microsoft stock would need to fall almost 25% for me to be put the stock and start accumulating losses from ownership.
The net effect of both trades is a 14-cent net credit, so I am getting paid to short Microsoft. Ideally, I want MSFT stock to fall 10% to 15% through July, but recover enough to hold higher than $40 per share through January. I only commit to this second trade if I believe in Microsoft’s value at lower prices (which I do). And I think the price buffer is healthy enough for me to take the risk.
I only sell naked puts in MSFT if and only if I am willing and able to own MSFT shares at the short put strike price. I would be responsible for losses below that level for as long as Microsoft’s stock price is falling.
I am not committed to holding these trades through expiration; I can close either for partial gains or losses at any time.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
