Microsoft had a great day Wednesday, rising over 2%. The stock is now sitting just below the 50-day moving average.
Wednesday, we looked at a bull put spread on Tesla, and I thought we could look at a similar idea today on Microsoft.
Microsoft's 200-day moving average is sitting at 410. A bull put spread could work well for traders who are willing to bet that the stock will stay above 410 for the next few weeks.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if Microsoft trades sideways or higher and even sometimes if it trades slightly lower.
With the stock trading around 423, if we use the Oct. 18 expiration, we can sell a 410 put and buy a 405 put for around $1.10.
Trade Could Generate 28% Return
Selling this spread would generate roughly $110 in premium with a maximum risk of $390.
If the spread expires worthless, that would be a 28.2% return in five weeks. That's provided Microsoft is above 410 at expiration.
The maximum loss would occur if Microsoft stock closes below 405 on Oct. 18. That would see the premium seller lose $390 on the trade.
The break-even point for the trade is 408.90. That's calculated as 410 less the $1.10 option premium per contract.
I would set a stop loss if the loss is equal to the amount of premium received. In this case, it would be $110. Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, Microsoft is ranked No. 2 in its industry group. It has a Composite Rating of 78, an EPS Rating of 93 and a Relative Strength Rating of 57.
AppLovin Spread Working Out Well
The bull call spread discussed Sept. 3 is already doing well, with AppLovin rallying over 13% Wednesday.
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 X/Twitter at @OptiontradinIQ
