A few weeks ago, I shared a setup to attempt to short Microsoft Corporation (NASDAQ:MSFT) but the stock broke out of its channel and rallied to new highs and the bearish set up was busted. Luckily since I used options, the trade cost me nothing.
Today I won’t try to get cute, so I will share an opportunity to create income from value in Microsoft stock.
Fundamentally the company is a long-term proven winner. Management under the leadership of CEO Satya Nadella has the respect of Wall Street and seems to have made the adjustment into this new world of ‘the cloud’ where local machines run off shared data hubs controlled by a few providers.
Experts report that MSFT’s Azure is chipping away at the lead that Amazon.com Inc (NASDAQ:AMZN) has with its dominant AWS. Compare this with the likes of International Business Machines Corp.’s (NYSE:IBM) floundering efforts in adapting to this new world.
Operationally, this environment suits MSFT well because it lowers the software piracy incentive. Subscription models make it cheap for users to get legitimate access to software, just to name an example.
Technically, it’s never ideal to commit long into a stock that is around all-time highs. This is especially tough for conservative investors like myself. I am uncomfortable risking $68 per share up here and without any room for error.
Click to Enlarge Instead, I will again use options so I can structure a bullish setup with a sizable buffer. I don’t have a problem committing bullish to MSFT stock now as long as I have some room to spare. The trick is to find proven support levels below which I can sell risk for income.
MSFT Stock Trade Idea
The Bet: Sell the MSFT Jun 2018 $47.5o put and collect $1.20 per contract to open. By doing so I am committing to buying MSFT shares at my strike but not before it falls 30% from here. This translates into a 90% theoretical chance of success and I am comfortable with that.
Usually I like to hedge my bet by selling equal opposing bearish risk for balance. In this case I am not rushing to do so and if I do it would be half sized. Meaning I will be twice bullish as bearish leaving me biased long.
The Hedge (Optional): Sell the MSFT Jun 2018 $80 call for $1.60 per contract. I will delay entry here for a few days to see how the general markets perform. Overall and given the buffer from current price in either direction and the time until expiration, I feel comfortable that I can manage my risk against short-term price gyrations.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. 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.
