Somewhere along the line, Microsoft Corporation (NASDAQ:MSFT) became the poster child for boring. It got so bad, that I’ve heard MSFT stock referred to as “where money went to die.” Not anymore. With the rise of the cloud, Microsoft has found new fans on Wall Street. MSFT stock is up 20% in the past year.
If you want to safely enter Microsoft stock near all-time highs, your best bet is to use Microsoft options. You don’t have to snipe the perfect entry point, and can instead fashion trades with a high degree of certainty.
Under a month ago, when MSFT stock was near its all-time high, I shared a trade that yielded fast profits. Today, with profits in hand, I am sharing another setup that would profit from the current range. I still like MSFT for the long term, but I see potential downside in the near term. Technically, the price action suggest short-term vulnerability.
Before you send out for my arrest, this is not a knock against the long-term viability of Microsoft. I am merely betting against the short-term price action and nothing more.
The Bet: Buy the MSFT May $65 puts for $1.40 per contract. This is my maximum potential loss. The idea here is to capture the move off the possible loss of this pivot level and/or a bearish move off the earnings event.
The Bank (Optional): To mitigate my risk, I will sell downside risk to finance my bet and eliminate my out-of-pocket expense. Sell the MSFT Oct $55 naked put for $1 per contract.
For a more conservative version of this pair trade I could turn them into spreads rather than naked positions. Selling spreads would change the risk profile into one with a finite value. Selling naked puts, however, runs the risk of netting potentially huge losses under $55 per share.
These trades are not required to be held through expiration. You may close either of them for partial gains or losses at any time.
Learn options as easy as 1-2-3 here. 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.