MSFT Bulls Can Buy a March Vertical Call Spread or Sell MSFT Feb. 11 Puts

I cover what I’m trading and how I’m looking at stocks and options. I can’t predict markets, stock prices or interest rates. Nobody can. All we can do is trade and manage risks.

By Donald E. L. Johnson

Independent Speculator

• Microsoft staged a strong rally with the markets Monday.

• OptionsAction panelists discussed a bullish MSFT vertical call spread.

• Income traders may prefer to sell MSFT puts.

While McDonald’s (MCD) charts hardly are bullish, Tony Zang, Chief Strategist at OptionsPlay.com, used his time on last Friday’s CNBC OptionsAction show to recommend a bullish vertical call spread.

The way Zang looked at the MSFT chart, the stock looked like it might be poised for a bullish snap back and run after it reports earnings Tuesday. MSFT’s fundamentals are strong and should do well, he advised. By Monday’s bullish close, his call looked pretty good.

His trade involved Selling one MSFT 3.18.22 expiration $340 strike call for $2.88 and buying one MSFT 3.18.22 $310 strike call for $11.25, or a net debit of about $8.37 per share. Each option is a contract to sell and buy 100 shares of MSFT stock. The maximum profit on the trade would have been $21.43 a share, assuming a trader got out at the right time and tried to maximize the profit, which many don’t do. The maximum loss would have been $8.37 a share, assuming the trade went wrong and the trader didn’t get out at a smaller loss before the trade expired.

A vertical spread is a trade for capital gains and requires a smaller capital investment than it would cost to buy the stock. The smaller investment doesn’t reduce the risk if you are thinking about losing the total investment in 53 days. Indeed, such trades succeed about 50% to 60% of the time for experienced and skilled traders who enjoy some good luck, according to data on OptionsPlay.com.

Instead of doing a moderately complicated vertical call trade, less experienced traders and income investors could instead sell cash secured puts (CSP) for a little income at a strike that limited their risks in this volatile market. Selling puts also is a bullish trade.

After opening at  $292.20 Monday, MSFT sank 5.5% with the market to $276.05. Then it rallied with the market to close at $293.37. That is compared with a 52-week Nov. 22, 2021 high of $349.67 and Jan. 25, 2021 low of $224.22.

Say the income investor wanted a lower risk trade with about 12% (delta -.12) probability of being exercised. Lower risks yield lower returns, but in this market, the name of the game is to contain risks while generating some premium income. Also, doing a trade that expires in 17 days instead 24 days gives traders more control in the face of volatility. A longer duration trade gives it more time to be profitable.

Based on Monday’s close of $296.37, the trade might be to sell one MSFT 2.11.22 $240 puts option for about $1.36. That would yield a 0.336% return on risk (RoR), or about 9.9% annualized if the same kind of trade was repeatedly done every 17 days during the next 12 months. I did the trade for $2.44 a share about an hour before the close and the stock’s rally and had a 44% gain at the close. If MSFT’s earnings beat as I expect, I’m hoping the stock will continue to rally, and I may take the profits quickly and move on. Or I can hold the position until it expires, hopefully, worthless.

A trade that would be riskier in terms of the probability of having the puts option assigned to the seller would be to sell one MSFT 2.11.2022 $295 strike puts option for about $10.75 a share. That would produce about a 3.62% RoR, or 77% annualized. The probability of having the stock close on the expiration day below $295 would be about 46% (delta -.46). If the stock is assigned, the net debit would be $295-$10.75, or $284.25 a share. The margin of safety (MOS), or discount at the strike price would be about 0.46%.

Beware. I'm an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. I reserve the right to trade any of the listed stocks at any time. I own and/or have options  on the stocks mentioned in this article. Full Disclosure: I wrote up trades for OptionsPlay for a few weeks and decided I needed to focus on my trading, not a part time job.

LINKS:

CNBC.com Video: https://www.cnbc.com/options-action/

Covered Calls Advisor. http://coveredcallsadvisor.blogspot.com

Covered Writer. http://coveredwriter.blogspot.com

OptionsPlay.com

SeekingAlpha.com

StockCharts.com

StockRover.com

YieldBusting Corner , https://join.slack.com/t/yieldbustingcorner/shared_invite/zt-11zpzo9au-r~L1jh8Jpte0XVgv5i0ibg