Microsoft Corporation Stock Is Ready for Another Breakout

The market correction dashed Microsoft stock bulls' hopes ... for a while

By Joseph Hargett, InvestorPlace Contributor

Microsoft Corporation (NASDAQ:MSFT) has transformed itself. The aging software giant still maintains a stranglehold on PC operating systems. That market is nowhere near as lucrative as it once was. But Microsoft has found a new and quite profitable market. The company reinvented itself as one of the hottest purveyors of cloud services.

Why Upside in Microsoft Stock Is Limited
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The transition from old to new is not one that many blue-chip companies handle very well, but Microsoft has done it in style. In its most recent quarterly earnings report, MSFT said that revenue rose 12% year-over-year. The results included a massive 98% spike in Azure revenue. Azure is Microsoft’s cloud services juggernaut, and growth here should continue to drive Microsoft stock higher.

I last suggested a trading idea on Microsoft stock ahead of this quarterly earnings report. MSFT was primed to rally to fresh all-time highs north of $96. Wall Street had other ideas, however. The February market correction send Microsoft stock tumbling to $84 — its lowest level since December.

Microsoft Stock
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Buying this low was the right thing to do, as MSFT shares have come roaring back. Unfortunately, this rebound was too late to save my pre-earnings trade recommendation for a Feb $95/$96 bull call spread. Meanwhile, the alternate trade idea of a Feb $87.50 put sell finished out of the money, though with Microsoft’s February plunge, some traders may have been assigned.

If you were assigned Microsoft stock at $87.50, you are now sitting on a gain of about 6.65% on the shares — not including the premium you received for selling the put. That’s a none-too-shabby return for less than a month on a held stock position.

Looking ahead, Microsoft stock is once again primed to rally into all-time high territory — market willing. The shares are pulling back to support in the $92 region this morning. This area is home to MSFT’s rising 20-day moving average. Additionally, support lies in the $90 region, with Microsoft’s 50-day trendline moving into the area.

Market sentiment remains as bullish as ever on Microsoft stock. Analysts maintain 27 “buy” ratings, compared to six “holds” and just one “sell.” The 12-month price target lies at $104.24, leaving plenty of room for upside in the shares.

Microsoft stock options traders are another matter. Sentiment remains cautious on MSFT, with the April put/call open interest ratio coming in at 0.73. Once again, this caution indicates that there is still buying power on the sidelines that could fuel gains for the shares.

As for April implieds, Microsoft stock options are pricing in a potential move of about 4.75% for the shares heading into expiration. This places the upper bound at $97, with the lower bound coming in near $88.

2 Trades for Microsoft Stock

Call Spread: Keeping in mind that market volatility is a risk in the current geopolitical climate, those looking to bet bullish on Microsoft stock might want to consider an April $95/$97.50 bull call spread. At last check, this spread was offered at 99 cents, or $99 per pair of contracts. Breakeven lies at $95.99, while a maximum profit of $1.51, or $151 per pair of contracts — a potential return of 52% — is possible if MSFT stock closes at or above $97.50 when April options expire.

Put Sell: As a second trading idea, a more neutral-to-bullish option is the April $87.50 put sell. With the trade, we’re banking on support at $90, which should help keep this option out of the money. At last check, this put was bid at 88 cents, or $88 per contract.

On the upside, traders will keep the initial premium received as long as Microsoft stock closes above $87.50 when April options expire. The downside is that should MSFT trade below $87.50 ahead of expiration, traders could be assigned 100 shares for each sold put at a cost of $87.50 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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