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.
Click to Enlarge 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.
