Microsoft Put Writes for Quick Income

The market sold off on the first day of the new trading year as investors worried about the continued impact of a resurging COVID-19 infection rate and a very bumpy rollout of the vaccine. Those worries seem reasonable, given the slight decrease in private payrolls. As CNBC reports:

Private payrolls in December contracted for the first time since the early days of the coronavirus pandemic, according to a report Wednesday from ADP.

The decrease of 123,000 provided a sign that the U.S. economy had cooled considerably heading into the end of 2020. Economists surveyed by Dow Jones had been expecting growth of 60,000.

However, there is still good news in the market. Traders seemed pleased with the Organization of the Petroleum Exporting Countries and several non-member countries (collectively known as OPEC+) decision to keep production levels relatively even.

The back and forth we have seen so far is basically what we would expect. Investors shouldn’t draw too many conclusions about the market until we have a few more trading sessions under our belt and volatility has calmed down.

Although they can be annoying, higher volatility levels keep option premiums elevated and mean we can find some good bullish trades at support.

Today we are eyeing Microsoft (NASDAQ:MSFT) as a target for short puts, but we want to make sure they expire before earnings later this month.

After the Hack

If you recall, last week U.S. government agencies were hacked through a vulnerability in systems operated by a company calls SolarWinds (NYSE:SWI). The hack has been investigated and it has many root causes, but it didn’t just affect government agencies. Microsoft was targeted.

As Zacks reported:

Microsoft Corporation MSFT in a blog post revealed that its ongoing investigation related to the SolarWinds SWI cyberattack detected that hackers were able to view some of its internal source code.

The company stated that it detected “unusual activity” for a few of its internal accounts and found out that one of those accounts has been employed to view source code in several repositories.

This bad news could have contributed to Microsoft’s pullback, but how big of a risk is this for investors?

As Investopedia writes:

The full impact of the SolarWinds breach, which Microsoft refers to as “Solorigate,” remains an unfolding story, including its effect on Microsoft and the company’s customers. A cause for optimism is the fact that Microsoft is taking this issue very seriously, continues to investigate, and apparently is willing to be open about the effects on its own business.

In other words, people will just have to trust Microsoft to properly deal with the issue. As a company with vast resources, it is likely going to be able to weather the storm. And as an investment opportunity, it still has growth on its side.

Growth in Microsoft’s Azure cloud products is still a blistering 47% on a year-over-year basis. And we can’t stress enough the nearly unique fact that MSFT reported its overall revenue grew by 13% and 12% in the second and third quarter 2020 on an annualized basis.

In our view, Microsoft’s growth in cloud computing, subscription software, and collaboration technology places it in the strongest possible position regardless of whether this data breach creates temporary fear in the market.

The Chart Gives Us a Target

We had been holding shares of Microsoft, which we initially purchased for $215 each, until last week. Our covered call expired, and our shares were called away for $220 each, meaning we made a profit. Since then, the stock has pulled back to support at around $215.

Daily Chart of Microsoft – Chart Source: TradingView

Whether that is because of the hack or because of the general action in the market, we can’t say for sure – it is likely a combination of the two.

What we can say is that $215 would make an excellent strike price for a put write.

And since Microsoft reports earnings on Jan. 27, we know we’ll need to set our expiration before then to avoid any earnings-related fluctuations.

When picking your expiration, look for a date that provides decent premium, without obligating you for too long.

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.


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