Up until this week, technology mega cap stocks have been mostly stars. Heavy weights like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) have rallied 20% in two months. Performances like these are usually reserved to momentum stocks like Tesla Inc (NASDAQ:TSLA). Mature corporations are supposed to rise moderately over time. Microsoft Corporation (NASDAQ:MSFT) is one of those stocks in question; it rallied over 25% since last November.
On Tuesday, Microsoft, much like the rest of tech, took a beating as it fell 2%. They were hit by the headline where the EU fined GOOGL 2.4 Billion Euros. The price action in that sector is often contagious so they trade in unison. That headline was in addition to another disappointing delay from politicians.
The question now becomes whether this weakness in tech stocks makes MSFT buyable or if it is the start of something more sinister. The short answer is that some falling knives are easier to catch than others. When MSFT falls I have value levels against which I can sell risk for income. The idea is to find where the fears become unrealistic and sell those odds to generate income.
Click to Enlarge Fundamentally MSFT is not as cheap as Apple Inc. (NASDAQ:AAPL) from a price-to-earnings perspective, but it’s cheaper than Nvidia Corporation (NASDAQ:NVDA). It sits at par with the like of GOOGL and Adobe Systems Incorporated (NASDAQ:ADBE). This give me a sense that it’s neither a screaming buy nor is it in bloated territory.
Beside, Microsoft’s price-to-book is under eight which means if I owning the shares around these is not likely a massive mistake over the long term.
Strategically, it is important to note that MSFT stock’s management successfully made the turn from traditional tech to new tech. Why is that important today? I refer to the stock price action as evidence. When a company like Microsoft is successfully navigating the new road ahead, dips become buying opportunity. Comparatively, dips in the likes of International Business Machines Corp. (NYSE:IBM) would not be as an obvious as entry points as MSFT.
Technically I see a potential support zone around $67.50 then another $2 lower. If MSFT falls to them, the bulls and the bears would likely fight it out hard. Neither will want to concede such important pivot levels.
MSFT Stock Trade Idea
The Bet: Sell MSFT Sep $62.50 naked puts and collect 90 cent to open. This trade gives me an 85% theoretical certainty that I will retain maximum premium for maximum gains. But if price falls below my strike sold then I have to own the shares and could suffer losses below $61.60.
It is important to note that management will report earnings in mid-July, so I could hedge my bet by buying cheap sacrifice puts through the earnings. This would cover the crash scenario should the earnings result in a terrible short-term price reaction.
In any case, not all investors are willing to sell naked puts. For those people, I can modify this trade to limit the risk by using spreads.
The Alternate Trade: Sell the MSFT Sep $62.50/$60 credit put spread, where I have about the same odds of success but with limited risk. If successful, the spread still delivers 15% in yield.
Compare this with risking $70 buying MSFT stock at face value and with no room for error. Then needing it to rally 15% to match the performance of the spread.
Selling options is dangerous so I never risk more than I can afford to lose.
Learn how to generate income from options 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.
