Some market prognosticators may tell you it’s high time to get your head out of the clouds. But if Microsoft Corporation (NASDAQ:MSFT) is part of the conversation, cloud-chasing with a modified, hedged position in Microsoft stock has rarely looked this good.
It has been a few months since my last writing about Microsoft stock’s bullish prospects both off and on the price chart. Gains of around 8% in shares have been good, though not entirely impressive given the S&P 500’s 9% and Nasdaq’s 8.5% increases over the same period.
But this strategist continues to believe MSFT stock has only just begun to scratch the surface for investors when it comes to delivering shareholder value beyond healthy stock buybacks, dividend increases and the like.
Not that those factors should be dismissed, but the real narrative in Microsoft stock worth paying attention to is the company’s continued strong execution in growth areas outside of the PC market.
For one, Microsoft’s commercial cloud business continues to support better-than-expected top- and bottom-line results at the corporate confessional each quarter. In fact, with double-digit revenue growth and annual sales of $20 billion expected by next summer, Microsoft’s cloud is big business.
And we’re not alone in thinking Microsoft’s cloud acumen is not being fully appreciated. CNBC’s James Cramer said as much Monday when discussing the company as far more than a software and PC shop and saying it’s time to take notice of Microsoft’s cloud business.
Other investors think there’s much, much more to Microsoft under the driven stewardship of CEO Satya Nadella as well. His “Mobile First, Cloud First” philosophy and technological vision for Microsoft should help set a path of growth for the next decade as the disruptive Internet of Things becomes more pervasive.
Microsoft Stock Monthly Chart
Microsoft stock is currently trading just off recent all-time highs secured in the immediate aftermath of its earnings results. The provided monthly view of MSFT shows an overall constructive situation and room for shares to continue their rally.
Prior to breaking above 1999’s all-time high near $60, Microsoft stock put in a good deal of consolidation work in the form of a nearly two-year-long base-on-base pattern.
The lengthy and durable platform has allowed for a successful launch into uncharted territory for MSFT shares. It has also helped keep the rally from becoming too steep in its trajectory and potentially prone to crumbling under its own weight.
A daily pullback pattern above the 50-day simple moving average and prior highs, as well as oversold stochastic condition help to confirm the larger bullish set-up. Technically speaking and for intermediate-term investors, a trailing stop loss of 5% – 8% is viewed as reasonable in keeping with the big picture both on and off the Microsoft stock chart.
MSFT Stock Modified Collar Strategy
Reviewing the MSFT options board, I like using a modified collar on Microsoft stock for positioning as part of a core holding within a portfolio.
Specifically and with MSFT at $64.35, an investor can sell the April $67.50 call for 51 cents and simultaneously buy the April $62.50/$60 bear put spread for 51 cents.
Combined with stock, the transaction costs $64.35, or the same as a naked long position in Microsoft stock, but with the benefit of hedging some of the downside risk.
Using this type financial engineering on MSFT, the bullish investor maintains nearly 5% of upside into April expiration with the sold $67.50 call initially capping profits at $3.15 per spread.
The max gain for this Microsoft stock position is unadjusted and calculated on an expiration basis, but does have the potential for larger gains if the investor rolls the position beyond the initial hedge.
If MSFT shares decline, the bear put spread portion of the combo affords the trader a partial, but very effective hedge from $62.50 – $60. The positioning is in keeping with our discussed ‘stop-loss’ zone which looks technically important. Lastly, in using a modified collar during a non-earnings cycle and a period where the expectation is for lesser or at least contained price volatility, the price is definitely right for this no-cost strategy.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
