I wrote about trading Microsoft Corporation (NASDAQ:MSFT) call options in January after Microsoft announced its plans to challenge for top spot with the Windows 10 operating system. The business fundamentals that I lined up in support of a profitable 2015 for Microsoft are still in place but the $50 call options I recommended has largely disappointed as Microsoft currently trades around $41 per share.
Microsoft is well known in the tech landscape because it is one of the few tech stocks with a blue-chip status. Microsoft with its market capitalization of $340.70B is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers.
Is It Time to Get Back on Microsoft?
An African proverb says, “When a horse throws one, the best response is to climb up again until the horse is broken” and that is exactly what we will be doing with MSFT call options. The shares of Microsoft have been largely unimpressive in the last six months as the chart below shows.
You will observe that the stock has had a selloff that saw it dropping 17% from its 52-week high of $50.04 to the current trading price of $41.41 (Red arrow). You will also observe that the stock now trades in a head and shoulder pattern as seen in the purple circle. Now, Microsoft’s head and shoulder has a $40.5 support and a $43 resistance level and the stock will eventually break down below the support or breakout above the resistance.
Factors That Support a Potential Breakout/Breakdown
Microsoft has fallen and then channeled for much of the last six months and it is somewhat hard to look at the company with much optimism. For instance, the stock has a Zacks Number 4 Rank “Sell” and it has a Zacks Style Score of D, B and F on Growth, Value and Momentum respectively.
However, we can look at the fundamentals of Microsoft’s operations to pick out drivers for optimism. For instance, the new Surface 3 might be able to challenge Apple’s iPad for some market share in terms of build quality, pricing and professional readiness. Even though the Surface brand was responsible for only 4% of Microsoft’s revenue in the last quarter, it has passed the $1B revenue mark and we can look forward to wider adoption going forward.
In addition, Microsoft’s Windows 10 could be a game changer as it promises to allow developers create build apps that will work across all devices while also provider a user-friendly and comprehensive apps library front-end.
Nonetheless, it doesn’t look as if Microsoft will be able to turn its lemons into lemonade in the short term. For one, the company has been cautious in its guidance for 2015 and it has slashed its FY 2015 guidance by 5%. In addition, analysts are not really optimistic about the prospects of the stock as 29 analysts on Yahoo Finance have an average FY15 EPS estimate of $2.39 on the stock to mark a solid 9% discount to the EPS of $2.63 that Microsoft posted in Fiscal 2014.
How to Trade MSFT Options
The jury is still out to determine if Microsoft would breakout or breakdown but we can realistically expect the stock to move when the company releases its Q3 2015 results in April 23 (exactly two weeks from today). Hence, it might not be smart to go all bullish or bearish on Microsoft since the stock can move in either direction.
I recommend trading MSFT Options with a straddle. You can set up the MSFT straddle with the MSFT Jul 2015 41.000 call (MSFT150717C00041000) at an asking price of $1.72 and the MSFT Jul 2015 41.000 put (MSFT150717P00041000) at an asking price of $1.72. The call contract and the put contract will cost you $172 each; hence, you will spend $344 (minus commissions) to set up a single MSFT straddle. You can expect to profit is the shares of Microsoft rises above $44.72 or if they fall below $38.28.
— Daily Option Alerts