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Microsoft (MSFT) stock is on a roll and is already up almost 16% YTD to $277.66 as of March 23 close. That includes an 11.3% spike so far this month from $249.22 per share at the end of February. This positive performance is attracting investors to near-term out-of-the-money short-put income plays.
For example, on Feb. 28, I wrote a Barchart article, “Investors are Still Keen on Microsoft Stock, Making Short Put Plays Popular.” That piece showed that shorting either the $230 or $225 put option strike price for expiration on March 31 would be profitable. The premium for the $230 strike price was $2.15 per put contract and $1.51 for the $225 strike price.
Now, today, those two strike prices are well down from these prices, which is exactly what a short-put investor wants to see. They have almost doubled their money in the past 3 weeks.
For example, the $230 strike price put premium closed at 12 cents on March 23 and the $225 put closed at 9 cents. That means that the $230 strike price short put investor has made 94.4% (i.e., ($2.15-$0.12)/$2.15, or $2.05/$2.15 = +94.4%) and the $225 strike short investor has made (i.e., ($151-$-.09)/$1.51 or $1.42/$1.51 = +94.0%).
What To Do Now?
As a result, the short put investor can now let these short put option positions expire worthless. Or they could “roll over” these trades by putting in orders to “Buy to close,” and then shorting new out-of-the-money (OTM) near-term put options. In addition, if the investor wants to let the trades expire worthless (and save some money) they can put additional capital to work, and short new OTM puts.
For example, the April 21 $255 strike price puts trade at an equally attractive premium - $2.45 in the midpoint. That means that an investor who shorts these puts will make almost a 1% yield for an option that expires in 28 days.
For example, if an investor secures $25,500 with their brokerage firm in cash and/or margin (i.e., 100 shares per contract x $255 strike price), then they can put in an order to “Sell to Open” 1 put contract and immediately receive $2.45 in the account. And $245/$25,500 works out to a yield of 0.96%, or almost 1%.
If this can be repeated each month, the investor would make an 11.5% return over 12 months. That is significantly higher than the 1% or so dividend yield that MSFT stock offers.
Moreover, investors are piling into this put option trade, as there are now 8,741 put option contracts already in place at this strike price.
In addition, this strike price offers good downside protection. For example, the investor's breakeven point is $252.55 (i.e., $255 strike price - $2.45 premium received.) That is $25.11 below today's price and reflects 9.0% downside protection (i.e., $25.11/$277.66 spot price today).
Similarly, for more conservative investors, the April 28 expiration put option chain shows that the $230 put option premium is at $1.31 per put contract. That amounts to a 0.57% return over the next 35 days (i.e.,$1.31/$230.00 x 100).
This trade is more conservative since MSFT stock would have to fall $47.66 over the next month or 17.16% before the investor would be required to purchase MSFT stock at $230. And even then the breakeven point would be $228.69, or 17.6% below today's price.
This shows that Microsoft stock, which is moving higher, offers good short-put income plays for conservative investors.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
