Microsoft Corp (MSFT) is trading at $27.36 today. The 52 week high for MSFT is around $32. The company is in decent shape, trades at a PE ratio of 10, has $55 Billion in the bank and has a healthy dividend. Here’s an Option play to buy MSFT at $26.50 AND partake in any upside in MSFT from the next earnings cycle.
THIS TRADE IS ONLY VALID IF YOU WANT TO OWN 200 MSFT SHARES. YOU DON’T HAVE TO OWN IT, BUT MUST BE PREPARED TO DO SO. IF MSFT GOES UPWARDS, YOU WON’T HAVE TO OWN IT.
Buy 1 contract Feb 2013 28 Call for 81 cents
Sell 2 contracts Feb 2013 27 Puts for 93 cents each.
Net credit received = (2 x 93) – 81 = $1.05
If MSFT is above 28 by Feb 2013, then your Calls and Puts will be profitable. Because you received credit for the transaction, anything over 28 will be a profit or a bonus on the Call Option, with the ability to partake in unlimited upside. And both the Put Options will expire worthless. If MSFT falls below 27, you get assigned on your 2 Put Options, but because you received the credit, the cost basis is less than $26.50/share.
IF MSFT EXPIRES EXACTLY BETWEEN $27 and $28, YOU KEEP THE $1.05 NET CREDIT
As mentioned before, you must want to own 200 shares of MSFT at a nice price. If this is not the case, then the 2 Put contracts will face a loss if MSFT falls below 26.50.
So the three outcomes are –
1) MSFT above 28 – Best case. Short Puts expire worthless, Call is making profits
2) MSFT between 27 and 28 – You keep the credit of $1.05
3) MSFT below 27 – you buy MSFT at a cost basis of 26.50