Breaking out to all-time highs has become a habit for many technology stocks this year. Surprisingly, the shares of software giant Microsoft Corporation (NASDAQ:MSFT) is even pacing the FANG stocks that have led the market higher so far this year. And while MSFT stock is once again trading near all-time highs, there is plenty more upside available for the shares.
As one of the companies that helped launch the original PC tech revolution back in the 80s, Microsoft has largely been counted out as a tech innovator — branded a company content to rest on is desktop market dominance. In fact, many analysts panned the company for not jumping into the Internet era fast enough back in the 90s and 2000s.
But Microsoft has finally found its stride in the cloud computing era.
By adapting its successful Office suite to the modern era, Microsoft is now the dominant player in cloud services, and the latest addition to its online offerings, Azure cloud computing services, is even dominating Amazon.com, Inc.’s (NASDAQ:AMZN) popular Amazon Web Services offerings.
Despite the billions already being made in cloud computing, the market is just getting started, meaning more revenue to send MSFT stock even higher. And we haven’t even touched the explosive potential of Microsoft’s AI offerings.
Sentiment and Options Backdrop
If you’ve followed my MSFT trading recommendations lately, you’ve learned first hand just how profitable betting bullish on the stock can be.
On May 16, I recommended a Jun $67.50/$70 bull call spread that hit its maximum profit target before the end of last month — nearly three weeks ahead of expiration.
Click to Enlarge While there will likely be a pause over the next week or so — Microsoft shares are trading in overbought territory right now — I believe MSFT still has more room to run before the current rally is through. That pause is going to provide a nice entry point for a long position.
Why? Because investor sentiment is still far from a bullish peak. In short, there are still bearish holdouts that could bring additional money off the sidelines for Microsoft stock.
Case in point, Thomson/First Call reports that 10 of the 36 analysts following the shares still rate them a “hold” or worse, with one indicating an outright “sell.”
Furthermore, the 12-month consensus price target rests at $74.34, just north of MSFT’s current perch. With revenue growth accelerating, and another quarterly report looming large next month, upgrades or price target increases are definitely a possibility.
More lingering pessimism for MSFT lies in the Microsoft options pits.
Currently, the July put/call open interest ratio rests at 0.73, with calls only just outpacing puts among options set to expire near the end of next month. While Microsoft has yet to set a date for its next earnings report, estimates put the date near July 21, the date monthly July options expire.
As such, I would expect to see a much higher rate of open call OI in this series — a concern that should rectify itself as soon as the official date is known, and drive July call options higher in value.
Overall, July implieds are pricing in a potential move of about 5.25% for Microsoft heading into expiration. This places the upper bound at $76.30 and the lower bound at $68.70. Again, should an official date be set prior to July expiration, it should drive implieds higher, making now the optimal time to jump in.
2 Trades for MSFT Stock
Call Spread: The trend is your friend on Wall Street, and while Microsoft’s trend may stall a bit for consolidation in the next week, the longer-term bull rally for Microsoft remains in tact. What’s more, earnings could provide another significant boost for MSFT.
As such, traders looking to remain on the bullish bandwagon might want to consider a Jul $75/$72.50 bull call spread.
At last check, this spread was offered at $1.00, or $100 per pair of contracts. Breakeven lies at $73.50, while a maximum profit of $1.50, or $150 per pair of contracts, is possible if MSFT stock closes at or above $75 when these options expire.
Put Sell: Traders concerned that the coming consolidation could linger longer than they would like (especially if Microsoft sets an earnings date after July expiration) might want to consider a Jul $67.50 put sell. At last check, the $67.50 put was bid at was bid at 44 cents, or $44 per contract.
As long as MSFT stock trades above $67.50 through July expiration, traders pursuing this strategy will keep the $44 premium. However, if Microsoft trades below $67.50 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $67.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
