One of the hallmarks of the ongoing stock rally is tech leadership. Large-cap technology stocks like Amazon (AMZN), Alphabet (GOOG, GOOGL) and Facebook (FB) have provided coat tails for the broader market to ride. Heck, even old school names like Microsoft (MSFT) are feeling the love.
After exhibiting all the qualities of a bear in hibernation, MSFT stock finally awoke in 2013 and hasn’t looked back since. The last few months in particular have been fantastic for shareholders. The sultan of software is up a ridiculous 40% since its August lows. And this is Microsoft we’re talking here, not some degenerate gambling stock like Valeant Pharmaceuticals (VRX).
Click to Enlarge
The gargantuan gains were scored in large part due to Microsoft’s October earnings release, which delivered a substantial jump overnight.
Even still, the stock rallied both beforehand and afterward to lengthen its reach heavenward.
Notably, MSFT stock had a breakout Tuesday; And after its bullish consolidation following earnings and the overbought conditions worked off, a new advance has taken root.
Options Plays on MSFT Stock
Microsoft’s bullish behavior has driven demand for options into the basement. With options being offered on the cheap, now’s as good a time as any to snatch up call options if you think the MSFT stock rally will continue into year-end.
Buy the Feb $55 calls for $2.80 or better. The max risk is limited to the initial $2.80 debit and will be lost if Microsoft stock price sits below $55 at expiration. The max reward is unlimited, offering unfettered participation on any further upside in Mr. Softee.
MSFT shareholders looking to lock in gains, or otherwise reduce risk, might consider the stock replacement strategy. The relative inexpensiveness of option contracts is making this an attractive proposition right now.
Basically, you can sell shares of stock and replace them with long calls. For example, if you owned 100 shares of MSFT stock, you’d currently have about $5,560 tied up in the stock. You could sell your shares and swap them out for a June $45 call option for $1,100.
The long call offers the same upside as the long stock position, but at a pittance of the cost ($1,100 vs. $5,560). By implementing the stock replacement strategy, you’re reducing your overall position cost (and risk) by 80% without giving up hardly any upside.
Sounds like a win-win to me.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
