Microsoft Corporation (MSFT), although boring for a long stretch, is once again a shining stock.
Under new management, MSFT seems to have regained some old tech pizzazz.
This attempt to short MSFT stock does not represent my opinion of the company’s value. It is a pure attempt at capturing price action that could unfold in the next few months.
Before I say how I plan on shorting MSFT stock, I will start by saying that I am a lifelong fan of its systems. I don’t see myself jumping ship anytime soon.
Fundamentally, I see good things from switching their model to online subscriptions. This shows commitment to current global trends.
Click to Enlarge Technically, Microsoft stock has risen strong and fast. It now sports a rising wedge. These often enough break down for a near-term pullback. This says nothing about the overall trajectory of the stock, it merely says that we could see a drop in the coming weeks.
My last attempt at doing a similar trade was successful, so I merely want to repeat the performance.
MSFT Stock Trades
Trade No. 1 — The Short: Buy MSFT Sep 23 $53.50 put. This is a bearish trade for which I pay 31 cents per contract. This is my maximum potential loss. I chose this level for technical reasons, as I see it possible that markets would want to eventually fill the earnings gap. Furthermore, I see hints from the open interest that suggest some downside pressure to $55 per share in the next few weeks.
To further lower my out-of-pocket expense, I will set a bullish trade to potentially offset my entry cost.
Trade No. 2 — The Bank: Sell the Jan $45 put. This is a bullish trade for which I collect 52 cents per contract. I only sell naked puts if I am able and willing to own MSFT stock at my sold strike price, even if it’s lower. If Microsoft falls below my sold strike price I would accrue losses. But even then, this gives me a 22% buffer from current price.
Taking both trades, ideally I want MSFT to fall through my bought put by late September but bounce above $45 per share through January. Even if Microsoft stock does nothing, I am left with a net credit of about 20 cents per contract.
If MSFT stays above $45 and my sold put expires worthless, any credit I collect from selling back my Sep 23 put is pure incremental profit. So in that case, I would keep the net credit and add to it from what I collect by selling back the near-term $53.50 put.
I am not obliged to hold either of these trades through their expiration dates. I can close either at any time for partial gains or losses.
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.