Microsoft Corporation (NASDAQ:MSFT) reported earnings last night after the bell. The initial reaction was a dip while Amazon.com, Inc. (NASDAQ:AMZN) was spiking on its massive earnings beat. But it didn’t take long before investors realized that Microsoft also delivered an impressive quarter and MSFT flipped.
MSFT is now rallying and it’s not just a relief pop. Investors are chasing solid fundamentals into upside opportunities for the company stock. This is one of the best company on the planet and this report reminded us why. Especially since under Steve Ballmer Microsoft seemed to be stagnating on cruise control. But under the new CEO, they are putting new tech initiatives in place and executing on them flawlessly.
Microsoft finally made the transition into this new cloud-driven technology world. Compare that to the failed efforts of International Business Machines Corporation (IBM) They beat expectations and lifted prospects for the future. So there really isn’t anything for the bear to sink their claws into. And therein lies the opportunity for me to generate some profits off solid fundamentals.
There are reasons to worry about chasing this late. So instead of buying MSFT shares outright and risking my money with absolutely no room for error, I will use MSFT options. There I risk less money yet still engage long. Options always yield higher percentage gains all else held equal.
To further reduce my out-of-pocket expense I will also sell downside risk into proven support in MSFT stock. This is a strategy I use only when I know I have a quality stock. Microsoft valuation from a price-to-earnings ratio perspective is not cheap; hence my reservation to risk almost $100 when markets are this nervous. But as long as they continue the execute on plans they should grow into their valuation with time.
Technically, Microsoft stock is 60% higher than it was at the.com bubble. So this break out is launching it into new territory. Onus is now on the bull to prove that they can maintain this trajectory. They have room to do it if overall market-wide sentiment cooperates. We currently have a battle between fear and fundamentals in the macroeconomic conditions.
The Trade: Sell MSFT Oct $82.50 put. This is a bullish trade for which I collect $2.58 to open. I have a 75% certitude that I will retain maximum gains. But if price falls below my strike then I own shares. I would then need to manage off my break-even point of $79.92.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the MSFT Oct $82.50/$80 bull put spread which has about the same odds of winning and would yield 40% on risk. Compare this with risking 94 per share here and, without any room for error, expecting a rally to profit.
The macroeconomic thesis is the driver of all conviction trades. So click here for a quick review of what’s driving this one and to get my free newsletter.
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.
