Microsoft Corporation (NASDAQ:MSFT) has been a premier tech giant for decades. Sure, it has had its fair share of flubs — many people still cringe at the failure that was the Zune — but overall, management is solid, and MSFT stock isn’t too dependent on any one individual.
Bill Gates has created a diversified cash cow system that diffuses impacts of potential errors.
Technically, the daily short-term chart suggests that more upside in MSFT stock price is likely. But I have to acknowledge that the longer-term weekly chart is more pessimistic than the daily chart.
So the theme for today’s trade idea? “Don’t overstay your welcome.”
How to Trade MSFT Stock Here
The bet: Buy the Mar $65/$67.50 debit call spread for 60 cents per contract to open. This is the maximum I can lose.
Buying a spread near the money always statistically carries a coin-flip odds structure for winning. But on the flip side (pun intended), as soon as Microsoft stock rallies, I start gaining. Furthermore, if the rally retests recent highs, I stand to double my money.
To mitigate my risk, I can sell downside premium against MSFT stock to lower my out-of-pocket expense. I only do this in stocks that I believe have a solid base that most buyers would be willing to buy on dips.
The hedge (optional): Sell the MSFT Oct $52.50 put for $1.10 to open.
By selling a naked put, I commit to buying Microsoft stock at the sold strike. Statistically, the 18% buffer from current price gives me a 90% theoretical chance of success. If MSFT stock falls through my strike sold before mid-October, I would be put the stock at $52.50 per share. If so, anything below $51.40 would accrue losses for me.
I can restructure the hedge trade to better suit more conservative traders.
The twist (optional): Sell the MSFT Oct $55/$52.50 credit put spread. This is also a bullish trade for which I collect 45 cents per contract to open. This has a slightly smaller buffer from current price but not too aggressively so. If successful, this trade would yield 20% on money risked.
If the MSFT stock price stays above my sold put strikes, then any premium I recapture by selling the debit calls spread would be pure profit. This means I don’t need Microsoft to rally for me to profit. I simply need it to stay above my sold downside risk.
I am not required to hold my Microsoft options open through expiration. I can close any of them for partial gains or losses at any time.
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.
