Microsoft has pulled from its recent high, but is still above a rising 50-day moving average.
According to the IBD Stock Checkup, Microsoft stock is ranked No. 2 in its industry group, and has a Composite Rating of 97, an EPS Rating of 91 and a Relative Strength Rating of 89.
What I'm thinking in this scenario is an unbalanced iron condor, with a slightly bullish bias.
This can be achieved by using a wider put spread than the call spread.
Trade Combines Two Spreads
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
First, we take the bull put spread. Using the July 21 expiry, we could sell the 320 put and buy the 310 put. That spread could be sold for around $1.35 late Wednesday.
Then the bear call spread could be placed by selling the 360 call and buying the 365 call. This spread could be sold for around $0.35.
Notice that the put spread is 10 points wide and the call spread is only five points wide. This gives the trade a slight bullish bias, but also more risk on the downside.
In total, the iron condor will generate around $1.70, or $170 of premium.
The profit zone ranges between 318.30 and 361.70. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Potential 20.5% Return On Microsoft Stock
The maximum risk is $830 on the put side and $330 on the call side.
If we take the premium ($170) divided by the maximum risk ($830), this iron condor trade has the potential to return 20.5%.
A stop loss in this case might be calculated based on 25% of capital at risk. That would be a loss of around $205.
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Please remember that options are risky, and investors can lose 100% of their investment.
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
