A few weeks ago, I shared a trade idea in Microsoft Corporation (NASDAQ:MSFT) from which I was lucky enough to scalp profits. Although I believe in the longer-term story, we could see temporary resistance in MSFT stock — at least in the short-term.
I’m still steadfast in the thesis that, given the current macroeconomic environment, stocks will at worst meander for months. Thus, I have a trade setup that will let time make us money.
Microsoft’s fundamental prospects remain solid. So, in the absence of a new bearish headline, MSFT stock should trade right along with the general equity markets. The short-term macroeconomic picture is riddled with nagging issues that could cause dips, but bulls have been buying them back up.
Because of Microsoft’s solid fundamentals, I want to put more time on the clock so I don’t have to worry about short-term price gyrations.
This is not the kind of trade idea you can use in unproven stocks like Snap Inc (NYSE:SNAP), by the way.
How to Trade MSFT Stock Here
The bet: Sell the Jan 2018 $50 put for $1.50 per contract. This is a bullish trade that assumes Microsoft stock will stay above my sold strike through next January.
By selling the put, I have committed to buying the shares at $50 if MSFT stock falls below that threshold. The current price buffer gives this trade — in which I’m betting that support levels established in 2014 will hold — a 90% theoretical chance of success.
Selling naked puts is not suited for all investors, however. That’s OK. I can modify the trade into a credit spread. This would make it more appealing to less aggressive traders or smaller accounts.
The alternate: Sell the Jan 2018 $52.50/$50 credit put spread. This is still a bullish trade, but one that has a finite risk profile. For that, I sacrifice some buffer and potential profits since with limited risk comes limited profit potential. If successful, though, this trade on MSFT stock will still yield 15% on risk.
Selling options can be dangerous, so never risk more than you are willing to lose.
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.