If you’re of the mind Wall Street has your back in Microsoft Corporation (NASDAQ:MSFT) stock, you may want to use a moderately bullish and well-designed long call butterfly to make an increasingly volatile trend a bit more friendly. Let me explain how you should trade MSFT stock here.
Microsoft stock isn’t going to win any stock market performance awards, that’s for certain. But with shares up over 50% since breaking out to record highs nearly 1.5 years ago and enjoying a near 500% gain since hitting rock bottom during the financial crisis nine years ago; MSFT stock has certainly enjoyed a nice bullish trend to be sure.
And some on Wall Street don’t see that trend and what I like to call the rebooting of Microsoft Version 2.0 ending anytime soon. Shares of Microsoft surged higher by more than 7.50% Monday on the heels of a bullish analyst note from JP Morgan which slapped a $130 price target on MSFT.
The new high Street estimate for Microsoft stock, if hit, represents nearly 39% of upside potential. It also has the distinction of putting MSFT’s market cap at a $1.0 trillion company and into a bullish conversation dominated by Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN).
Supporting the enthusiastic and ‘sky is the limit’ share price raise, JP Morgan is confident Microsoft’s pre-existing enterprise assets and Public Cloud solution differentiates and puts the company at a distinct advantage over Amazon and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). The firm anticipates Microsoft will grow its current market share from 21% to 44% over the next three years.
Microsoft Stock Daily Chart
A series of higher highs and lows. It sounds so simple. Yet as the Microsoft stock chart can attest, following a basic trend configuration, even when it does keep to the technical program, isn’t necessarily always easy to stick with in practice.
Since I last wrote about MSFT stock, shares have become increasingly volatile, along with the broader market. That’s easy enough to appreciate by taking a cursory glance at shares since breaking out to all-time-highs in late 2016. The bottom line? The squiggly line has moved from a steady and increasingly tenacious uptrend to one which is much more erratic and difficult to navigate.
By our reckoning, buy and sell decisions trying to improve upon trend trading through moving average failures, volume distribution and other indicators have complicated the only certainty on a price chart — namely, stocks will open at 9:30 a.m. EST and close at 4:00 p.m. EST.
Kidding aside, when I did approach Microsoft stock in early February, the discussion stressed downside risk rather than trying to “milk this near decade old bull market” as MSFT flirted with the psychologically seductive $100 price level. Now that our caution has worked its way onto the price chart, not much has changed in our outlook or strategy, which despite the addressed concerns, remains cautiously bullish, yet very defensive as only an options trader can appreciate.
Microsoft Stock Moderately Bullish Butterfly
Just like our last discussion, I remain bullish longer-term in MSFT and a buyer on more significant price weakness. At the same time I still hold the view calling a top in a persistent, albeit volatile trend is a difficult, if not costly way to invest.
Reviewing Microsoft’s options board, the April $97 / $100 / $103 call combination for 45 cents with shares at $93.78 is favored. This particular butterfly spread limits the cost to less than 0.50% of the risk of owning MSFT shares. The position offers a nice profit range starting just above the current high from $97.40 and all the way up to $102.60. Also attractive, the max payout with this strategy is $2.60 if MSFT landed on $100 at expiration.
The real risk in using this spread is if Microsoft rallies too strongly near-term. Ultimately, the paid debit would be lost above the $103 call, which means this play is positioned for moderately bullish gains.
In closing, profits offered by this MSFT butterfly won’t win any awards among momentum traders. However, the position can definitely provide handsome returns and offer limited and reduced risk exposure that’s guaranteed to have your back just in case Wall Street doesn’t.
Disclosure: 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.
