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Microsoft (MSFT) not dead money for traders

|Includes: Microsoft Corporation (MSFT)

A lot of articles have been written here on Seeking Alpha about (NASDAQ:MSFT) of late. Some claim that Microsoft is dead money. I understand that sentiment. One author pointed at the recent purchase of Skype as “pulling a Microsoft.” That statement made me laugh. Realizing MSFT has a poor history, you still got to wonder if maybe this time the company has something up its sleeve with Skype. Win 8 is loosely scheduled for next winter; could it be that Skype will be incorporated? On the other hand, other authors point to the fact that MSFT has tons of cash and an economic moat, and therefore shares are cheap.  The company has a certain promise for sure, but investors have been disappointed time and again.

As investors, the real question is: can we make money trading in MSFT? It’s a relatively boring stock; with not much volatility in either the shares or the options. Boring can be good. So, whether you think it a mature company with some growth prospects, or dead money, it’s still possible to turn a profit.

- MSFT is very actively traded as stock, and also the options. There seems to be support for it at $24 per share, which just happens to be where we are now. But, this support is uncertain since not tested in a long time (October).

- Recent drawdown to about $23 happened about a year ago on Jun 29. The stock steadily rose since then to a peak of about $29; then has been steadily falling since.

- Max drawdown was to $15.28 in March of 2009.

- I love dividends when long, and who doesn’t? I like to make 3% when I can: for that to happen, the price would need to drop to about $21.30, or the dividend would need to be increased from 64 to 72 cents per year. At the current price of about $24, MSFT yields about 2.70%, which isn’t half bad, especially since 3% is getting harder to find.

- The next earnings announcement will be ~ Jul 18, which is the Monday after options expiration for Friday, July 15th.

- The next ex-dividend date ought to be the middle of August.

- The company’s fundamentals are very good.

(MSFT) @ $23.91 as of the close on Friday, June 3rd

Play #1: naked put sale (or cash-secured put sale)

STO* -1 MSFT Jan 19 2013 25.00 Put: $4.05

Break-even is $20.95
Margin: sold strike of $25 less $4.05 credit = $2095

This play allows me to purchase the shares where the dividend yield is more to my liking. The obvious problem being that if the shares drop below $21, I’d be in losing territory. But I would not mind too much, depending on how low the shares go, since the dividend yield at this price is a bit over 3%. If the shares go on a nice bull run instead, I keep the $4.05 credit, which translates to 11% gain on an annual basis, or 19% for the full ~600 days. Gain is calculated upon the margin requirement.

Play #1a: sell put spread (credit vertical put spread)

STO* -1 MSFT Jan 19 2013 22.50 Put; $2.72
BTO* +1 MSFT Jan 19 2013 20.00 Put; ($1.75)
Net credit on the bid/ask is $0.97

Break-even is $21.53
Margin: difference between sold and bought strikes of $250, less the credit received of $97, or $153.

This variant on Play #1 is a safer play, since I'd also own a put, should the whole market or MSFT really tank badly. Any shares acquired would be at $21.53, plus I still have the bought put active, which may be worth some money depending on when the shares are put to me. The dividend yield at the $21.53 buy price is 2.9%. Should MSFT go on a bull run instead, I keep the $97 credit, which translates to a 38% gain on an annual basis, or 63% for the entire 600 days. These percentage gains are figured on the margin requirement.

Play #2: long stock

BTO* +100 MSFT; ($23.91)

Break-even is $23.91
Margin: cost of stock or $2391

An obvious play to directly participate in (MSFT), for either good or bad. The dividend yield is about 2.7%

Play #2a: synthetic long stock

STO* -1 MSFT Jan 19 2013 25.00 Put; $4.05
BTO* +1 MSFT Jan 19 2013 25.00 Call; ($2.35)

Net credit on the bid/ask is $1.70
This establishes long stock, but options don’t pay dividends.

Break-even is $23.30
Margin: sold strike of $25 less $1.70 credit = $2330

This long stock substitute gets a credit the account. I would participate only in price movement, unless the shares are put to me: at that time I’d be long 100 shares @ 23.30, plus still own a Jan 2013 $25 call. The break-even price is right about where the stock hit the low last June. The potential gain or loss is the same as with long stock.

Play 2b: modified synthetic long stock

STO* -1 MSFT Jan 21 2012 24.00 Put; $1.95
BTO* +1 MSFT Jan 21 2012 24.00 Call; ($1.66)
STO* -1 MSFT Jan 21 2012 27.50 Call; $0.51
BTO* +1 MSFT Jan 21 2012 20.00 Put; ($0.63)

The first two options establish synthetic long stock similar to Play #2a.

Net credit on the bid/ask is $0.17
Break-even is $23.83
Margin: difference between sold and bought Put strikes of $400, less the credit received of $17, or $383.

This combines a credit put spread with a debit call spread. Gains are limited to the sold call at $27.50. The way this is structured, the play guarantees a gain or loss, just like with long stock. However, gains and losses are limited. Maximum gain is $367, versus a maximum loss of $383. That loss can be mitigated if you should want to own MSFT at a little less than the current price. Also, if the shares are put to you early on, the bought put is still active, as is the call spread, and these could well be worth some money, or held.
 

*STO: Sell To Open
*BTO: Buy To Open

Hopefully, you can get some ideas for your own use from the above.

Disclosure: intend to make an option play on (MSFT) this coming week, probably Play 1a or Play 2a.