When investors started pushing out of tech stocks and into financial stocks, we used the pullback as an opportunity to collect put-write premium on Microsoft (NASDAQ:MSFT).
Though the market may have stalled out yesterday, the mega-cap FAANGM stocks pushed the Nasdaq higher. Traders have a chance to generate even more income from MSFT with a put write.
MSFT is still growing because of increased business spending on software, technology and cloud computing, but it also offers a strong dividend, which is rare for a technology stock.
In this market, a growth position that offers regular, steady dividends just can’t be beaten, and we think investors will feel the same.
Crossing 10,000
The S&P 500 and the Dow Jones Industrial Average dropped slightly yesterday, but the Nasdaq crossed above 10,000 for the first time — albeit briefly — primarily because of the FAANGM stocks.
While there was plenty of profit-taking across the market, investors don’t seem ready to abandon their tech positions, especially the more stable ones.
If you look at the chart of the Technology Select Sector SPDR Fund (NYSEARCA:XLK) and the S&P 500, you can see that while the market fell, the tech sector was rising. XLK is nearing its former highs, but the S&P 500 is still struggling.
Daily Chart of the Technology Select Sector SPDR Fund (XLK) and the S&P 500 — Chart Source: TradingView
XLK’s top two holdings are in MSFT and Apple (NASDAQ:AAPL), so it’s safe to say they have a big influence on this exchange-traded fund.
Futures are relatively flat this morning, possibly because investors are waiting to see what the Federal Open Market Committee has to say this afternoon. A brief stall will give traders the chance to enter a bullish put write on MSFT before it inevitably starts rising.
Reasons for Caution
We feel it is still appropriate to be cautious because discount brokers are reporting smaller average order sizes and a higher trade frequency. That is a sign that much of the market’s momentum is being driven by smaller traders, which usually isn’t a sign of stability.
We are concerned, but it’s also not an outright bearish signal either.
Traders should focus on stocks that have had the best stability during the rally, like MSFT, because both the small and large traders are attracted to these positions.
From a technical perspective, not much has changed since we made our last recommendation on MSFT. The stock has continued channeling higher, but it broke out of the “pennant” consolidation pattern we have been monitoring, which is another confirmation of the bullish trend.
Daily Chart of Microsoft (MSFT) — Chart Source: TradingView
We wouldn’t recommend setting too high a strike price for this position. The stock still has support around $180, and by picking an expiration date in early July, traders should be able to collect a decent premium.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
