The tale of the tape over the past few days has been one of rapid rotation. Tech stocks — the belle of the ball — have taken a back seat while financials and small caps have played catch up. The profit-taking in the technology is providing pullbacks in many overheated names, including Microsoft Corporation (NASDAQ:MSFT). And therein lies opportunity.
MSFT stock has capitalized on Wall Street’s love affair with tech stocks by scoring a 15% year-to-date gain. Just last week, Mr. Softee notched new all-time highs. And like all well-behaved trending stocks, Microsoft finds itself perched atop rising 20-, 50- and 200-day moving averages.
What’s more, the trend is increasing in momentum, as confirmed by the increasing distance between its last two pivot highs.
Volume patterns have been supporting the ascent of MSFT stock. Accumulation days litter the landscape, showing big buyers scooping up shares with aggression.
Buying dips in such an environment is always an attractive proposition.
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In eyeing potential support levels for Microsoft’s current descent, the $70 zone stands out for two reasons:
- First, it’s the current position of the 20-day moving average. The location of this smoothing mechanism is always a potential gathering ground for dip buyers.
- Second, prior resistance sits in this area. And since old resistance often becomes new support, it’s a level worth watching.
The MSFT Trade
MSFT options are pricier than most other tech stocks. In fact, its IV rank of 54% is about the highest of all the mega-cap companies. And that makes option selling strategies attractive.
If you think this price dip gets bought like all its predecessors, sell the July $67.50/$65 bull put spread for a net credit of 33 cents or better. In timing the entry, I suggest waiting a day or two to see if buyers step in to halt the descent. MSFT stock still could retreat another $1 or $2 before buyers step in.
The max reward will be limited to whatever credit you receive at trade entry. Remember: To capture the entire profit, MSFT simply needs to sit above $67.50 at expiration.
The max risk is limited to the spread width minus the net credit. So that’s $2.50 minus your initial premium. To minimize the damage, you could exit if the stock falls below the $67 support level.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
