Microsoft (MSFT) – Recent Tech Sell-Off Offers a Buying Opportunity

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

The following two articles offer compelling reasons why MSFT could move higher. The first is an analyst upgrade with a price target of $240 – Microsoft Stock (MSFT) Gets Price Target Increase To $240 From Mizuho. The second article outlines MSFT’s competitive advantages –  2 Tech Stocks That Are Thriving Despite the Coronavirus.

Technicals

We offered a trade idea in MSFT at the start of August and the option spread used in the idea expired for a 74% profit on Friday. Because of the decline over the past few days, the stock is once again testing the same trendline that made the trade attractive last time around. The 50-day moving average is also in play and this is an indicator the stock has not closed below in over four months. Friday’s candlestick formation signals buying activity and that the support confluence is being defended, at least so far.

MSFT Chart September 2020

If you agree there’s further upside ahead for MSFT, consider this trade which relies on the stock remaining above $212.50 through expiration on October 9.

Buy To Open MSFT 09OCT20 210 Puts (MSFT201009P210)
Sell To Open MSFT 09OCT20 212.5 Puts (MSFT201009P212.5) for a credit of $1.20 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when MSFT was trading near $214.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $118.70. This reduces your buying power by $250 and makes your investment $131.30 ($250 – $118.70).  If MSFT closes at any price above $212.50 on October 9, both options will expire worthless, and your return on the spread would be 90% ($118.70 / $131.30), or 1027% annualized.

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates September 5, 2020

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry