After a short pause, tech stocks seem to be all the rage again. Tuesday, the Nasdaq composite was up 0.3% while the Dow Jones was down 1.1% and the S&P 500 was down 0.8%. That disparity continued Wednesday. The return to tech could translate to a high return on an option play for Microsoft stock.
Microsoft (MSFT) closed at a new 52-week high on Tuesday and continued moving on Wednesday. It had a bullish look along with the market shift.
Crucial support lies around its 175 stock price, which coincides with the rising 50-day moving average. There is also strong support for Microsoft stock at 186.
Previously we’ve looked at bullish trades with around one to two months in duration. Some traders prefer trading short-term options that have the potential to generate much higher gains on an annualized basis. The downside is less time for the trade to perform as expected.
Two Options For A Bull Put Spread On Microsoft Stock
Assuming someone was looking to trade a bull put spread on Microsoft stock, they could generate roughly $95 in premium by selling the 185-180 spread with a July 17 expiration. The capital at risk on that trade would be $405 (the spread between strikes minus the premium). That gives the trade a 23.5% potential return in 36 days. Annualized, that equates to 231.4%.
A trader could go for a shorter expiration with the 190-185 bull put spread by knocking a month off the expiration to June 19. They could generate around $85 in premium. But the risk with this spread is that it’s closer to current Microsoft stock price, so it has a bit less margin for error.
The risk is $415 for the potential $85 return, or 19.9%.
Remember, with the bull put spread you are selling the put at the higher strike price and buying the put at the lower strike price. You get max profit if Microsoft stock closes above the higher strike price at expiration.
Risks And Returns
Of these two option trades for Microsoft stock, the June expiration offers slightly less return than the July expiration. But it achieves it in a lot less time if the trade works out.
That equates to an 807.2% return on an annualized basis.
That’s a huge number, but don’t expect every trade like this to be a winner. Short-term options can be very risky. As you may remember from any Finance 101 class, with high returns comes high risk. So do your due diligence before using weekly options. When they go against you, there is very little you can do to salvage the trade.
Sometimes, the best trade is no trade at all.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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