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
NOT BAD…
Just saw this trade. The stock has fallen a dollar already. Does this trade still make sense or should we move the strike prices by a dollar
Warren, the concept still remains. So instead of the Short Puts at 27, you can do them at 26 and similarly for the Long call at 27 instead of 28
i have friends at MSFT who still have stock options with an exercise price of $80 per share.
Pity those poor souls. they are working for free now
Good trade. I like covered calls so a trade like this can be used to pick up shares first. Of course the caveat is if it falls too much before the Feb expiry then it may not be worth it
Louis, yes you’ll need to pick up the shares first. You can sell the Puts at a price you;re comfortable taking ownership of the stock. If it falls, just lower your strikes. The basis for the trade remains the same
What will you do if MSFT falls to $25
Guy, the trade is valid only if you wanted to hold MSFT for the long term. From a fundamentals standpoint, it is attractive now. If you did not want to own MSFT for the long term, then you wouldn’t be interested in this trade..
I already own MSFT. How can I take advantage without selling the stock
You can sell Covered calls at higher strike prices and keep the premium if MSFT does not hit those levels. But if it does, your stock may get called away but it’ll be at the higher price. Also the premium you collect is yours to keep.
Why would you want to own this loser
Lol..
If you did not want to own the stock what would you do. Microsoft is dropping to the breakeven for this strategy
Jerry if you did not want to own the stock, this trade may not be for you..Its a specific strategy to own MSFT at a price you like
okay but microsoft is alreadt 26.50 now. how would you adjust this trade
Remi, there are no adjustments to this trade. Either you get to pick up the stock or you get to keep the premiums. Meanwhile, if the stock makes a big move up, then you participate in that move..