After winning big back in October, it’s time once again to take a look at Microsoft Corporation (NASDAQ:MSFT). Shares of the software behemoth turned cloud-computing juggernaut are finally settling down following a blowout first-quarter earnings report back in October, and it’s finally time to look skyward once again.
Source: Mike Mozart Via Flickr
Let’s take a quick look back at MSFT stock over the past couple of months. Back in mid-September, the shares were bumping up against resistance near $75. This was a long-term technical hurdle for MSFT, and taking it out would mean considerable upside.
Before making a serious run at $75, MSFT stock regrouped at support from its 50-day moving average. The shares bounced and entered a short-term bull run heading into earnings the week of Oct. 27. Microsoft’s earnings were impressive, blowing away the consensus estimate and pushing MSFT stock to fresh multi-year highs north of $80.
Ahead of the event, I offered up an options trading strategy for a Oct. 27 $77/$77.50 bull call spread. By my pre-market figures on Sept 19, the trade cost just 3 cents, or $3 per pair of contracts. Traders who got into this options trade were ultimately able to bank a maximum return of more than 1,400% — roughly $47 per contract.
With no earnings driver this time around, returns won’t be quite as robust, but I’m still looking at plenty of upside for Microsoft … and it starts with MSFT stock price action.
Following a post-earnings consolidation period, MSFT stock once again pulled back to support near its 50-day moving average. In the past, such tests of support have preceded sizeable gains for MSFT, the most recent augmented by earnings.
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The shares have already rebounded from this support, and have taken out resistance at $85 — an area that capped MSFT stock’s post-earnings rally. With that technical hurdle out of the way, the next area of resistance lies at $90, leaving nearly 6% in short-term upside.
Sentiment remains largely the same for Microsoft. Thomson/First Call reports that 27 of the 34 analysts following MSFT stock rate the shares a “buy” or better — up from 25 out of 34 back in September. The 12-month price target, meanwhile, rests at $92.13, leaving room for potential price-target increases as analysts reasses their outlooks for 2018.
Turning to the options pits, pessimism dominates Microsoft’s January 2018 options backdrop. Specifically, the January 2018 put/call open interest ratio has risen to a reading of 1.72, as puts nearly double calls among back-month options. That said, many of these puts have been out there for a while, and are likely tied to MSFT stock as a form of insurance.
January 2018 implieds, meanwhile, are pricing in a potential move of about 4.3% for Microsoft stock heading into expiration. This places the upper bound at $88.50, with the lower bound coming in near $81.50.
2 Trades for Microsoft Stock
Call Spread: The expected move this time isn’t as big, and volatility is always a concern heading into a new year … so don’t expect a 1,400% return this time around. Those looking to be bullish on MSFT stock might want to consider a Jan 2018 $87.50/$90 bull call spread.
At last check, this spread was offered at 53 cents, or $53 per pair of contracts. Breakeven lies at $88.03, while a maximum profit of $1.97, or $197 per pair of contracts — a potential return of 271% — is possible if MSFT stock closes at or above $90 when January 2018 options expire.
Implieds are only pricing in a move to $88.50, so a maximum return might be a bit of a reach. Be sure to set your stops according to your own expectations.
Put Sell: If a more neutral-to-bullish stance is more your speed, then a Jan 2018 $80 put sell position has an excellent chance at finishing out of the money. At last check, this put was bid at 39 cents, or $39 per contract.
On the upside, traders will keep the initial premium received as long as Microsoft stock closes above $80 when January 2018 options expire. The downside is that should MSFT trade below $80 ahead of expiration, traders could be assigned 100 shares for each sold put at a cost of $80 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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