It’s time to buy into a friendly trend both off and on the price chart in Microsoft Corporation (NASDAQ:MSFT). For investors that appreciate stronger risk control in a seasonally weak environment, however, a fully-hedged collar position on MSFT stock makes a good deal of sense for just a few pennies more. Let me explain.
Under the stewardship of CEO Satya Nadella, MSFT stock has flourished. Now the man behind the company’s solid reboot is moving past his highly successful “mobile-first” vision and putting artificial intelligence, or AI, high up on the list of mission priorities.
In an annual company filing just last week, Microsoft removed any mention of mobile first, cranked out references to AI on six occasions, put the budding technology into its corporate vision statement and noted:
“We believe a new technology paradigm is emerging that manifests itself through an intelligent cloud and an intelligent edge where computing is more distributed, AI drives insights and acts on the user’s behalf, and user experiences span devices with a user’s available data and information.”
It sounds good to this strategist and looks good for Microsoft in our opinion. And mind you, that’s with the realization AI is enjoying its share of liberally-applied bullish buzz courtesy of Wall Street’s marketing machine.
Bottom line, AI is the type of growth market which could easily build into a secular trend from here. And given Microsoft’s competitive position and what the company has managed to do with its mobile-first vision under Nadella, I’d say it’s time to ride a good-looking trend off and on the price chart.
Microsoft Stock Weekly Chart
Click to Enlarge
Looking at the end of the week setup from this past Friday’s close, MSFT has formed a nice-looking hammer candlestick on the provided weekly chart. The bullish price action is the latest evidence Microsoft’s much friendlier price trend, since clearing its former all-time highs, remains intact.
Nothing is perfect, of course. In this instance, MSFT stock’s stochastics could be interpreted as a modest warning for investors looking to get long shares.
As mentioned prior, there are also macro reasons that are capable of coming to a head and seasonal bearish trends that might also potentially derail Microsoft shares.
Without getting too caught up in what could happen, simply trusting an existing and far from over-the-top bullish trend off and on the price chart in Microsoft looks like smart business when coupled with good risk management.
Microsoft Collar Strategy
Click to Enlarge
Considering our continued belief in Microsoft’s uptrend — while still recognizing the importance of downside protection and acknowledging shares also aren’t a strong momentum candidate — the collar spread remains a preferred way to position.
Reviewing Microsoft’s options and shares at $72.68, the Sept $70 put/$75 call combination is priced for $72.86. So what does the additional 18 cents of premium offer investors wanting to get long MSFT stock?
First, and most importantly, a collar on MSFT shares offers guaranteed protection in case the current trend turns uglier or simply breaks down altogether. With this particular spread risk is contained to $2.86 or 3.9% thru September expiration from the insurance provided by the mostly financed, long put contract.
Additionally, this Microsoft investor is in a much better financial and mental position to consider accumulating shares if a larger price decline occurs and the price action is determined to be an opportunity to buy on weakness.
On the upside, and if the Microsoft collar is left unadjusted, profits are initially capped at just under 3% as the $75 call has been sold.
For a holding period of six weeks, and MSFT stock’s typically tame volatility characteristics, that’s a nice return to be sure. Rolling the position “out and up” under bullish conditions is also possible, so this investor can continue to ride and profit smartly from a MSFT stock trend that will feel a good deal friendlier.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
