Don’t Go Soft on Microsoft Corporation (MSFT) Stock Just Yet

Microsoft is on course to dominate cloud computing, and the rally in MSFT stock is far from over


When I last checked in with Microsoft Corporation (NASDAQ:MSFT) back in early April, I talked about a potential breakout, driven by the company’s expanding cloud and artificial intelligence initiatives. Microsoft got that break, and on April 21, MSFT stock broke out of a trend channel in the $65-$66 range to hit fresh all-time highs.

Don't Go Soft on Microsoft Corporation (MSFT) Stock Just Yet
Source: Shutterstock

While third-quarter earnings were merely ho-hum, the real story behind Microsoft’s new mojo lies in the clouds. Specifically, revenue at the company’s Intelligent Cloud unit rose 11% to $6.76 billion, with Azure leading the way with a 93% surge in sales.

Azure is currently the market leader when it comes to business cloud services, and competes directly with, Inc.’s (NASDAQ:AMZN) Amazon Web Services (AWS) division.

With Microsoft expanding it’s control of the cloud computing market, investors sent MSFT stock soaring. The shares are up roughly 4.5% since late April, and are now looking to establish a base in the $68-$70 region.

MSFT stock chart
Click to Enlarge 
Furthermore, Microsoft’s recent retreat from resistance near $70 could mark an excellent entry point for a long position on the shares, as Microsoft consolidates its recent gains and looks to head higher.

Turning to the sentiment backdrop, Microsoft has always been a bullish favorite on Wall Street. Currently, data from Thomson/First Call indicates that 24 of the 34 brokerage firms following Microsoft stock rate it a “buy” or better. Additionally, the 12-month consensus price target rests at $74.13, representing a minimal premium of about 8.3% to yesterday’s close.

With Azure revenue growing by leaps and bounds, look for upgrades or price target increases down the road for Microsoft shares

Options tell a different story, however.

Put open interest is on the rise as options traders bet on a retreat from recent highs for MSFT stock. In fact, the June put/call open interest ratio has risen to a near-term high of 1.45 — unusual territory for Microsoft’s put/call ratio, as puts easily outnumber calls among back-month Microsoft options.

Overall, June implieds are quite low for MSFT stock — well below historicals, even. In other words, Microsoft options are cheap right now. The expected move for MSFT shares comes in at just shy of 2% ahead of June expiration, putting the upper bound at $69.85 and the lower bound at $67.15.

2 Trades for MSFT Stock

Call Spread: Traders looking to bet on a return to recent highs for MSFT stock might want to consider a Jun $67.50/$70 bull call spread.

At last check, this spread was offered at $1, or $100 per pair of contracts. Breakeven lies at $68.50, while a maximum profit of $1.50, or $150 per pair of contracts, is possible if MSFT stock closes at or above $70 when these options expire.

Put Sell:  Low premiums aren’t conducive to selling premium, but low volatility does cut down on the risk associated with put sell positions. Additionally, MSFT has a tendency to trend sideways unless driven by events such as earnings.

As such, traders looking to add a little cash to their portfolio might want to consider a June $65 put sell. At last check, the $65 put was bid at was bid at 31 cents, or $31 per contract.

As long as MSFT stock trades above $65 through June expiration, traders pursuing this strategy will keep the $31 premium. However, if MSFT trades below $65 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $65 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC