There’s more reasons than ever to be optimistic on Microsoft Corporation (NASDAQ:MSFT). But for investors, hedging the associated risk with a modified MSFT stock collar makes sense (and cents) on several levels. Let me explain.
It’s no secret: It’s not 1999 and MSFT stock isn’t the go-go growth stock it was back at the turn of the century. Yet, it’s looking good for shareholders both on and off the Microsoft stock chart.
What should be appreciated by investors is how far Microsoft has come in building its brand and its wherewithal beyond its ubiquitous Windows OS and PC market. And that’s going to continue driving shares of MSFT higher.
A reboot of sorts over the past couple years under the strong management of Satya Nadella has seen Microsoft quickly making a name for itself and capturing market share in new, key growth areas like the cloud, AI, virtual and augmented reality, and even an anticipated refresh of its Xbox gaming platform.
The most recent proof of what I affectionately called Microsoft 2.0 back in March is last month’s mixed, but more bullish-than-not, corporate confessional.
For those looking for flaws, total revenues for MSFT stock came in just shy of Street forecasts due to a bit of weakness in “more personal computing” products spearheaded by sluggish sales of the company’s Surface tablet.
More importantly, MSFT stock sported an earnings topper backed by strong sales growth of 93% from the company’s Azure cloud computing platform. Many investors see the latter result as today’s all-important metric in measuring Microsoft’s progress going forward and guarding against another Ballmer-like repeat.
As InvestorPlace’s Chris Lau explains in greater detail, Microsoft is in a solid position to create further value for its investors.
Microsoft Stock Weekly Chart
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Since breaking out above its 1999 all-time-high near $60 a share from a fairly large base-on-base pattern, traders have been quick to jump in and support MSFT stock on much shorter pullbacks in duration and size.
The latest manifestation of this increased interest in owning shares of Microsoft is a high-level, double-bottom pattern that’s developed over the past three to four weeks since earnings.
Bottom line, MSFT stock has confirmed a bullish pre-earnings gap with a successful test last week — and there’s little to suggest shares won’t move higher from here. But in case there’s a bump in the road, a modified collar looks well-suited for the occasion.
MSFT Modified Collar Strategy
Considering the overall bullish view for MSFT stock, but also enjoying some type of protection, I like the idea of approaching shares with a modified collar strategy.
Reviewing Microsoft’s options and shares at $68.20, selling the Weeklys 23 June $70.50 call and purchasing the 23 June $66.50/$64 put spread is priced for even money. Thus, when combined with the purchase of MSFT stock, the trader is paying an identical $68.20 for the spread package.
What’s this combination entitle a MSFT stock investor to? On the downside, this position maintains protective value of up to $2.50 below $66.50 or a bit more than 3.5% on an expiration basis.
The trade-off for this protection is the fact it is limited. Below $64 in MSFT stock and the insurance coverage offered from the purchased bear put spread is exhausted.
Also, most often this type of hedge is slower to gain value as MSFT declines in price. But with earnings risk out of the way, a bullish price pattern and fairly decent downside coverage from $64 to $66.50 for no additional cost — I like this modified spread over a traditional collar in Microsoft.
Bottom Line on MSFT Stock
What about the upside? If left unadjusted and if MSFT stock rallies, profits are initially capped at $70.50. That works out to an expiration profit of nearly 5% for a holding period of just one month. That should sound nice considering the price for admission.
Even better, an investor can always continue to adjust the spread to ride the trend even higher — and in the process, establish even stronger coverage of their “you know what” during the next earnings season if desired.
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.
