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De-Risking A Microsoft Position

|Includes:Microsoft Corporation (MSFT)

I am long Microsoft because I believe it to be a sound investment. Microsoft has been a good business for many years but failed to excite investors. In spite of dominating its industry, gushing cash, good margins and good growth, investors were more focused on Microsoft's squandered opportunities and poor acquisition choices. Recently, Microsoft has a new CEO that seems to be pointing Microsoft in the right direction. While I like Microsoft, I do not love Microsoft, and only see it as a tool to make money not as something I can not live without. If I am high on Microsoft, why would I sell it? Let me explain.

Approximately a month ago, I wrote a May 17, $40 put on Microsoft. I also am long Microsoft with a position that is twice the size of the put trade. I have de-risked my Microsoft position by selling half of my long position in Microsoft at a $3 profit. The put premium was $1.09. In less than 6 months time, my return on Microsoft was $3 on the capital gain, $1.09 put premium, and $.28 quarterly dividend. This is a 10.9% total return in less than 6 months. I will take a 20% annualized return on a relatively safe company anytime.

Why did I feel the need to de-risk my position in Microsoft, when I believe in the long term success of Microsoft? First, technology has been very soft lately, and Microsoft is experiencing increased volatility. Second, good results that were reported on the earnings release seem to have been mostly baked into the price. To me, the overall market is starting to look extended, while small caps and technology looks like they may have already peaked.

If Microsoft goes below $40 at expiration, I will get assigned the stock. This will increase my Microsoft position to its original size. If Microsoft is above $40 at expiration I will not get assigned but will experience a potential opportunity loss. However, I am still long, although with a smaller position, so I can not get left out. I say potential because you have to be able to sell before the market takes it all back. If you have not noticed, stock prices are fickle and temporary.

Finally, Microsoft has been a great vehicle to make money on, if you have been willing to write options on it.

Disclosure: I am long MSFT.

Stocks: MSFT