The media coverage of the stock market these days is filled with gloom. Yet, I look at the indices and see that we are sitting on all-time-highs. Just this week, the small caps index, which is a basket of 2000 stocks, set several all-time high records. Yet the perception still is that we are in trouble. What gives?
We do have reasons to worry. The U.S. is on the verge of a global tariff war in an effort to renegotiate better terms on several deals with China, Europe and NAFTA members. We also have the U.S. Federal Reserve in the process of raising rates.
So the challenges are real which makes it easy to ignore the good news. Companies like Microsoft Corporation’s (NASDAQ:MSFT) for example have bulletproof balance sheets and incredible profit-and-loss statements. So if we look at their prospects for the next few months and ignore the outside noise, then we’d realize that there’s plenty of more upside potential.
I realize that for the short-term there could be bumps along the road. So today’s trade setup is designed to absorb those bumps and keep the eyes on the longer-term prize through 2018. I use options so I don’t have to risk my money buying MSFT shares at $99. Using options I can leave a big buffer zone so I don’t have to sweat every red tick in the markets.
Fundamentally, Microsoft stock is not expensive since it sells at a reasonable 27 price-to-earnings ratio. This is a massive company that quickly adapted to the new tech world that we are currently in. Under the new leadership of Satya Nadella, MSFT is making great use of the cloud to grow its base. I have been an avid fan of its systems for decades and I am also a fan of the stock even at all-time high levels. Nevertheless, I feel better having the protection I can set in options.
Technically, there is reason to worry. The MSFT stock year-to-date performance has been phenomenal thereby creating a rising wedge that is tightening. If this wedge breaks then there would be downside targets at $96 then $94 per share.
Click to Enlarge These are pivot zones so they will be in contention. Long-term I am confident in the stock performance but I do want to leave pick proper levels where I see proven support.
The experts on Wall Street agree as most have a BUY rating on MSFT. Yet it is still trading below their average price targets.
I know it’s difficult to buy stocks at their all-time highs but it will be a long-term winner.
The Trade: Sell MSFT Sept $87.50 naked put and collect $1.10 to open. Here I have an 85% theoretical chance that I would retain maximum gains.
If the stock price falls below my strike, however, then I own the shares and would suffer losses below $86.40.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell MSFT Sept $87.50/$85 bull put spread where I have the same odds of winning. Then the spread would yield 12% on risk.
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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.
