Profit From the Microsoft Corporation Run

MSFT stock’s trend is getting pricey off and on the price chart

By Chris Tyler, InvestorPlace Contributor

It’s not a”Dot.bomb” scenario by any means, but be warned Microsoft Corporation (NASDAQ:MSFT) isn’t cheap. But if you’re a prone to riding extended trends for every last drop, one safer way to milk this bull is using a lower cost, bullishly modified butterfly on MSFT stock. Let me explain.

Microsoft has had a nice run. Maybe not to the magnitude of the company’s heyday, but a near-500% gain since the bottom of another market crash nine years ago — and MSFT stock rocketing past those former highs in the process — isn’t exactly chump change.

But that friendly trend and one I enthusiastically supported back in late October, should have bulls treading very lightly right now.

Don’t get me wrong. I still thoroughly believe in Microsoft Version 2.0’s longer-term prospects due to the company’s successful movement into growth markets like cloud-computing and artificial intelligence. But as InvestorPlace’s Will Healy notes, today’s investors are paying a steep premium off and on the price chart to own MSFT stock at current levels.

MSFT Stock Monthly Chart

It has been a bit more than a year since MSFT stock cleared the prior century’s all-time-high set during the feeding frenzy. And what a breakout it’s been with shares up 52% and as much as 60% just last week. Of course and as mentioned, that’s just the latest in what’s been a phenomenal bull run in shares of Microsoft.

But I’m worried Microsoft’s days in a friendly trend could be numbered, if they are not already up.

After rocketing higher since the financial crisis lows, MSFT stock’s rally is now looking extended technically. The provided monthly chart shows how shares are hugging the upper Bollinger Band in an unsustainable and aggressive manner not unlike the era and its associated major peak.

I’m not suggesting any bearish historical repeats are going to occur. And to be honest, an overbought MSFT stock isn’t far from the psychologically pleasing $100 century mark, which could act like a bullish price magnet.

At the end of the day though, I’m more concerned about downside risks than trying to milk this bull.  Bottom line, given the broader indices’ own frothy valuations and staggering near decade-long Bull Run — if history rhymes, a correction lasting longer and deeper than two days and 9% is overdue at this point in time.

MSFT Stock Bullish Butterfly

Given what’s been discussed above, you might expect some type of bearish play on MSFT stock. But you’d be wrong. I’m bullish longer-term and would be a buyer on more significant weakness. As well, I respect that calling a top in a persistent trend is a difficult, if not a costly way to invest.

Bearing that in mind and after reviewing Microsoft’s options, a modified bullish April $92.50/$97.50/$100 call butterfly looks attractive. With MSFT at $91.33 this combination is priced for $1.30.

What does this position offer investors? Below $92.50 at expiration, the debit will collapse to $0, resulting in a negative return of 1.45%. That’s the bad news.

The good news is the loss could conceivably be small potatoes if history does indeed rhyme over the next few weeks to couple months. As such, this strategy versus owning long stock puts the investor in a much stronger position to buy shares if a deeper discount in MSFT stock does materialize. But that’s not all.

If Microsoft’s trend persists, this investor is positioned to profit dollar-for-dollar with a rally above $93.80 up to $97.50 where there’s a max payout of $3.70 at expiration. Further, unlike a regular symmetrical butterfly, this position maintains a profit of $1.20 above $100 and prevents an over-priced and too trendy MSFT stock from completely making a mockery of our more cautious stance.

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.

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