Microsoft Corporation: A ‘Cloudy’ MSFT Is Good for Traders

Prior to its LinkedIn Corp (LNKD) acquisition, Microsoft Corporation (MSFT) stock was on its way to recovering from a negative reaction to third-quarter earnings.

Traders chose to focus on Microsoft’s earnings miss, but largely ignored the $10 billion in cloud services revenue. Microsoft has long said that the cloud is the future of its core services products (Office 365, etc.), with a target of $20 billion in revenue by 2018. Microsoft is already halfway to that goal.

MSFT stock
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The LinkedIn acquisition set MSFT stock back slightly, but the shares are looking to bounce back in style — with a little broad-market Brexit relief thrown in for good measure.

Microsoft stock is currently bouncing off support in the $50 region, and looking to challenge short-term resistance near $52. MSFT is looking to fill in its April gap lower, and a break above $52 could be the catalyst for such a move.

Turning to MSFT’s sentiment backdrop, the stock enjoys a rather bullish on Wall Street. According to data from Thomson/First Call, 23 of the 37 analysts following Microsoft stock rate it a “buy” or better. Specifically, 38 of the 50 brokerage firms following MSFT rate the shares a “buy” or better.

There is still room for improvement, however, as the 12-month consensus price target of $57.75 represents a modest premium of only about 13.3% to Wednesday’s close. Upgrades or price-target increases in the wake of the LinkedIn acquisition could help boost MSFT stock.

Outside of Wall Street, options traders are also betting big on MSFT. Currently, the July put/call open interest ratio for Microsoft stock rests at 0.60, with calls easily outnumbering puts among near-term options. This ratio also arrives in the lower third of all those taken in the past year for MSFT stock.

Turning our attention toward short-term implieds, July 15 series options are pricing in a 4.2% move for MSFT over the next month. This places the upper bound at $53.14, while the lower bound lies at $48.86.

2 Trades for MSFT Stock

Call Spread: With an upside bias due to an (expected) positive Brexit vote and MSFT’s former uptrend toward filling its April gap, MSFT bulls may want to consider a July $52/$53 bull call spread. At last check, this spread was offered at 37 cents, or $37 per pair of contracts. Breakeven lies at $52.37, while a maximum profit of 63 cents, or $63 per pair of contracts, is possible if MSFT stock closes at or above $53 when these options expire.

Put Sell: On the other hand, if market headwinds are a concern, or if you’re just not sure how Brexit will go, a put sell may be more your speed. Along those lines, a July $46 put sell has a good chance of finishing out of the money. At last check, the $46 put was bid at was bid at 15 cents, or $15 per contract.

As long as MSFT stock trades above $45 through July expiration, traders pursuing this strategy will keep the $15 premium. However, if MSFT trades below $45 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $45 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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