Traders bought the dip Monday, and that normally means it’s a good time to increase your bullish exposure to the market. However, in this case, we are a little concerned about the lack of “tech support.”
For the most part, the rally was focused on financial and industrial stocks, while tech companies were left behind.
We can partially explain this as a function of increased optimism about the international trade situation — particularly around a potential Brexit deal. However, that is still speculation, and the lack of momentum in the tech sector made us a little wary.
Because the market has been “cool” to Microsoft (NASDAQ:MSFT), along with other tech stocks this week, we think selling a covered call is an excellent way to generate income while we wait for the market to decide where it’s headed.
Maximizing Income While the Stimulus Debate Continues
The market cooled off a bit yesterday while investors waited for more encouraging news about a new round of stimulus from the U.S. government. Progress, or the lack of progress, towards another round of stimulus will likely be one of the most important X-factors for stock returns over the next month.
At this point, we still feel that a price channel and increased volatility is the most likely short-term scenario for the major indexes. Therefore, managing our risk exposure by maximizing income is the right strategy.
We’re holding shares of MSFT right now, something we’ve done several times over the last few years, and while many investors have struggled to see the company’s potential now that it is no longer purchasing TikTok, we’re quite comfortable to wait for the stock to bounce in the short term.
The company has grown its competitive position in cloud computing and subscription sales while simultaneously taking advantage of the recent move to distance learning and remote work. We feel great holding the shares.
But at current levels, we also think we have an income opportunity. Even if the stock is off its highs, this is still a good time to think about harvesting some income after the recent bounce.
If you, like us, are holding shares of MSFT, selling a covered call against the stock is a great way to collect income while the market consolidates.
Collect Extra Income by Looking Beyond Earnings
We welcomed MSFT back into our portfolio for $215 per share, and the stock is sitting a little below that level now.
There is plenty of volatility in the market right now, which means option sellers have opportunities to collect much more income. With MSFT, we want to maximize what we collect in the short term. That means taking on a little more risk.
The stock has developed a little resistance at around $212.50, and that level would make a good strike price for our call options as a result. To ensure we collect even more premium though, we want to sell a call that expires after MSFT reports earnings in October.
Daily Chart of Microsoft Corporation (MSFT) — Chart Source: TradingView
The company is scheduled to release its third-quarter earnings report on Oct. 21, and if we sell an option that expires after that, we can collect even more premium.
After all, a stock is more likely to make bigger moves after reporting earnings. That extra volatility means investors are willing to pay more for options.
There is still a chance MSFT disappoints or has some bad news ahead of earnings. That would give traders a chance to buy back their calls at a lower price and sell more options for even more income. A later expiration date could take longer to lose value to time decay, which would make it harder to buy back the options early for a lower price.
On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it.