Microsoft Corporation (NASDAQ:MSFT) is getting top-heavy. Like the rest of the market, MSFT stock appears to be running out of fuel to drive its current bull rally. While we’re not in complete “sell” mode just yet, there is an opportunity for short-term bears to make some money in the coming month.
Microsoft’s weakness begins with its technical backdrop. Specifically, the shares recently formed a double-top in the $74 area. What’s more, this weakness is amplified by the fact that MSFT posted solid quarterly earnings results last month, and still was unable to find enough buyers to push it over this technical hurdle.
Click to Enlarge As of now, Microsoft stock has breached its short-term 10-day and 20-day moving averages, with the latter now acting as resistance in the $72.50-$73 region. Should selling pressure take hold again, the next level of support is the stock’s 50-day trendline near $71.50 and the round-number $70 area.
A breach here could send shares toward bear-market territory.
Sentiment and Options
Turning to sentiment, we find a mostly rosy outlook for MSFT stock.
For instance, Thomson/First Call reports that 26 of the 36 analysts following Microsoft stock rate the shares a “buy” or better, with only one “sell” rating to be found.
Meanwhile, the 12-month consensus price target rests at $80.12, representing an 11% premium to Microsoft’s current perch. There isn’t any material reason for analysts to lower their expectations for MSFT stock right now, but weakness in the broader market could prompt some of these bulls to have a change of heart.
Turning to Microsoft’s options pits, we find more indifference than bullish or bearish sentiment. The September put/call open interest ratio rests at 0.79, with calls barely outnumbering puts among front-month options. While not a direct bearish indicator, this lack of a strong opinion from speculative traders certainly does not bode well for a continued bull run for Microsoft.
Overall, September implieds are pricing in a potential move of about 3.3% for MSFT heading into expiration. This places the upper bound at $74.40 and the lower bound at $69.60. Options traders are clearly worried about overhead resistance in the $74 region, with many hedging a potential breach of key support at $70.
2 Trades for MSFT Stock
Put Spread: Traders looking to profit from short-term weakness might want to consider a Sep $70/$72 bear put spread.
At last check, this spread was offered at 67 cents, or $67 per pair of contracts. Breakeven lies at $71.33, while a maximum profit of $1.33, or $133 per pair of contracts, is possible if MSFT stock closes at or below $70 when September options expire.
Put Sell: For those with a more neutral-to-bullish lean, a Sep $69 put has plenty of potential.
At last check, this put was bid at 35 cents, or $35 per contract. The upside to this put sell strategy is that you keep the premium as long as MSFT closes above $69 when these options expire. The downside is that should Microsoft trade below $69 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $69 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.