Microsoft Corporation (NASDAQ:MSFT) stock has had a fantastic year. It’s up 25% in 52 weeks but not on pure speculation. Microsoft actually has current tangible value and an improving business model fueling its bull run. This is not the case where investors are chasing the future prospects of MSFT stock.
Microsoft’s management successfully adapted to the new normal of tech, which is largely based on the cloud. For example, the subscription model for Microsoft office makes it easy for their clients to stay current with the latest versions. This lowers the temptation to pirate them.
Microsoft is not expensive relative to its sector. Its price-earnings ratio is under 30, which seems high relative to say Apple Inc. (NASDAQ:AAPL), but cheaper than Alphabet Inc (NASDAQ:GOOGL) or Facebook Inc (NASDAQ:FB). But the fact that its P/E is the same as that of the floundering General Electric Company (NYSE:GE) is enough to tell me that MSFT is not bloated.
Technically, Microsoft’s stock has had a steady rise and without too much chop. This is a sign of strength and buyer conviction. Of course, it helps that the markets in general have also been resilient but that too looks like it will persist into 2018. So investors are likely to continue buying the dips and therein lies my opportunity.
I want to profit from the persistent bullish price behavior in MSFT through the next few months. No, I won’t buy the shares outright because that would leave me no room for error. Instead, I will use options so I can better control my risk level.
Click to Enlarge It’s never ideal to chase prices higher late in the rally. Yes, MSFT stock has had a few bad days of late but it’s still within 2% of its highs.
This is the result of a steep ramp in a short period of time. I could wait to see if there will be more downside, but I am certain that I won’t be able to perfectly time my entry with the absolute bottom, so why wait? That’s another reason why I favor using options over buying the underlying.
The $72 per share zone should be a support level for MSFT stock. This was the baseline from which bulls mounted their last rally. This makes it a level of contention meaning that’s it’s been resistance and support.
Even if that eventually fails, $70 is another pivot point that would be secondary support. My risk today will be below both of them. Consider them my moats in case I am early going long MSFT stock.
It is important to note that analysts expectations are not overzealous. This is a good thing so not to be vulnerable to a deluge of downgrades. However, current price is closer to the upper end of the price-target range, so I am eager to leave a sizable buffer just in case.
The Trade: Sell MSFT stock Dec $67.50 puts naked and collect 85 cents to open. Here I have an 85% theoretical chance that price will remain above my strike. Otherwise, I must own the shares and could suffer losses below $66.65.
Traders who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Safe Trade: Sell MSFT stock Dec $67.50/$65 credit put spread which has about the same odds of winning. If the spread wins it would yield 15% on risk
Investing in the stock market carries risk so I never bet more than I can afford to lose.
Learn how to generate income from options 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 as @racernic on twitter and stocktwits.