An Options Play To Get Long Microsoft

About: Microsoft Corporation (MSFT)
by: Julius Ferraro

With a market cap of $230 billion Microsoft (NASDAQ:MSFT) is the largest software company in the world. Its operating system is in almost every PC purchased.

The company is also trying to diversify itself more into the consumer market with its Surface tablet, Xbox gaming system, Windows phones, and purchase of Skype. By becoming a more consumer oriented company Microsoft will be able to create a new income stream in addition to the enterprise, as well as increase its brand recognition.

So far this year the stock has hit a high of $32.95 and a low of $24.69. The stock is currently trading in between these levels at $26.88. The decline has been quick and unexpected for a company of this size. At current price levels I believe there are many attractive reasons to get long Microsoft:

  • The company is cheap at 10 times earnings
  • Windows dominates nearly 90% of PC market for operating systems
  • It has a 3.4% dividend with a small 34% payout ratio with room to go
  • It has bought back nearly one billion shares in the past five years
  • Its balance sheet is in top shape with $55 billion in net cash (24%)

My options play is:

  • Buy 1 FEB 2013 $27 strike call= -$1.06
  • Sell 2 FEB 2013 $26 strike puts for .7 each= +$1.40
  • This play nets +$0.34

This play allows you to gain any upside above $27 as if you owned 100 shares

If Microsoft were to go below $26 by expiration you would be assigned 200 shares at $26.

This option spread would allow you to participate in Microsoft's Q2 earnings scheduled for January 24, 2013. It would also allow for any upside in stock price if Microsoft were to announce a special dividend before year end. This upcoming earnings report is extremely important because it will capture the Christmas season sales of Microsoft's Surface tablet and Windows 8 operating system.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.