With many growths stocks tumbling recently, it’s important to look for strong stocks when trying to find bullish options trades. The relative strength on Microsoft stock is strong enough to justify a short-term option trade. But while the annualized returns are impressive with the short duration, consider that there is also extra risk.
The ratings on Microsoft (MSFT) are strong, with a Composite Rating of 98, an EPS Rating of 93 and a Relative Strength Rating of 90. The megacap hasn’t had a problem continuing to perform. In fact, it’s been the megacaps like Microsoft stock that have largely been propelling the indexes to highs, almost on their own.
Previously, we’ve looked at bullish options trades of around one- to two-month durations. Some traders prefer trading short-term options. They have the potential to generate much higher gains on an annualized basis. So let’s look at how to set up a bull put spread on Microsoft stock.
Bull Put Spread For Microsoft Stock
On the chart for Microsoft stock, crucial support lies between 305.32 and 305.84. That area also coincides with the rising 50-day moving average.
For a bull put spread, the options trader is looking at being an overall seller in the options market and collecting a premium. On MSFT stock, they could generate roughly $75 in premium by selling the 325-320 spread with a Dec. 17 expiration. That’s selling the put option with a 325 strike and simultaneously buying the 320 put.
The capital at risk on that trade would be $425 so the trade has the potential to generate a 17.7% return on risk in 37 days. Considering the short duration, that comes out to an even more impressive annualized return on risk of 268.4%.
Is A Shorter Duration Better?
If the trader instead decided to trade a much shorter-term spread on Microsoft stock, they could look at the Dec. 3 expiration. Here you generate around $65 in premium for selling the 330-325 spread. The risk with this spread is that it is a little closer to the stock price, so it has a bit less margin for error.
This spread can make around $65 on risk of $435. The potential return on risk is less than the previous trade at 14.9%, but the shorter duration of just 10 days makes a big difference.
That equates to a 545.40% return on an annualized basis for this options trade on Microsoft stock.
Before you get too excited about the huge number, recognize that doesn’t come without a cost. Don’t expect every trade like this to be a winner. Short-term options can be very risky, and hopefully we all remember from Finance 101: Higher returns generally come with higher risk.
Do your due diligence before using weekly options. When they go against you, there is very little you can do to salvage the trade.
Please remember that options are risky, and investors can lose 100% of their investment.
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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