Are you waiting for the next catalyst in Microsoft Corporation (NASDAQ:MSFT) to buy shares? Well I’m here to say, “Don’t!” In conjunction with options on MSFT stock, a fully hedged collar makes it the right time and price to get involved today! Let me explain.
As discussed several weeks back when last writing about MSFT stock, it’s no secret, it’s not 1999 for Microsoft. The fact it’s not 1999 also continues to be a very good thing for shareholders off and on the Microsoft price chart.
Yet many investors will opt to wait patiently on the sidelines to see if the next corporate confessional or other piece of future information will yield a better opportunity for buying MSFT stock. Bottom line though, waiting around has proven costly in the past year with gains of 40%.
And there’s little to suggest Microsoft can’t continue to rally to fresh highs!
The other bottom-line, top-line and squiggly line on the financial statements and price chart suggest Microsoft stock, backed by a successful reboot into key growth markets and dominance in the PC market, is still going places. And that my friends, is a friendly trend to join today, right here and right now!
MSFT Stock Weekly Chart
When I last wrote about Microsoft in May, shares were positioned for investors to purchase on a pullback. Specifically, MSFT had established a smallish double-bottom base which had successfully tested a triangular breakout for support.
Over the past few weeks, not only did the pattern low hold, but new all-time-highs were captured in MSFT stock.
Most recent, shares of MSFT have pulled back and established yet another tight basing formation. By our reckoning it’s the fourth such pattern for shares since breaking out of a much larger base-on-base structure and then above its all-time-high of $59.97 set back in 1999.
Net, net the price action remains very constructive with little reason to think MSFT won’t continue to trend higher in the second half of 2017.
MSFT Stock Collar Strategy
Given the overall bullish view for MSFT stock, but realizing runaway gains are probably unlikely and appreciative of downside protection, a collar is a sensible way to position. This is especially true with earnings on the horizon late next month and the potential for undesirable gap risk.
Reviewing Microsoft’s options and shares at $69.79, the Aug $65 put/$75 call collar is priced for $70.49. What does the additional 60 cents of premium over MSFT stock entitle a bullish investor too?
On the downside, this position ensures that during the life of the collar, risk is contained to 7%. Below $65 and for a full month past the earnings event, the trader is protected by maintaining the August put in his or her inventory against long MSFT stock.
What about the upside? If left unadjusted and MSFT stock rallies, profits are initially capped at 7% by the $75 call which has been sold. Given that kind of gain over three months, that’s far from terrible. Even better, adjustments and rolling the spread “out and up” mean the investor can continue to profit if MSFT rallies further.
Bottom line, with an effective and much smaller loss of just 7%, the trader, if so willing, is in much better financial (and likely mental) health to consider adding to the position on weakness.
This means a severe price drop in shares can be considered a gift rather than the start of something more menacing for MSFT stock.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
