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Microsoft (MSFT) stock may have bottomed, which could be a good entry point for value investors. Selling short out-of-the-money (OTM) MSFT puts in nearby expiry periods sets a lower buy-in target and lets investors get paid while waiting.
MSFT is at $387.15 in midday trading on Friday, March 14. This is just above its trough of $378.77 yesterday. That presents a good opportunity for value buyers. But there is no guarantee, so one way to play this is to short OTM puts.
I discussed this in a recent Barchart article on Feb. 17: “Microsoft Stock Is Off Its Highs - How Can Value Investors Play This?” The article discussed shorting the $400 and $390 strike price puts when they were OTM and set to expire next Friday, March 21.
Those put option strike prices have now moved in-the-money. That means the short-put investors may be early-assigned to buy shares at these strike prices. That's why the brokerage firm requires cash or buying power to cover the purchases.
But this should not worry these investors. They have already received income, lowering the breakeven prices. Moreover, even after any early assignment the investor can either sell covered calls against these shares or do a new short-put play to recover any unrealized loss. (The investor could also do a rollover - close out the position at a loss and put on a new lower strike short-put position at a later period for a higher credit than the loss).
Shorting OTM Puts Today
For example, look at the April 17, 2025, expiration period, 34 days to expiration (DTE). This shows that the $375 strike price put option contract has a midpoint premium of $7.03.
That means that the short-seller of these puts can make an immediate yield of 1.875% (i.e., $7.03/$375.00).
Moreover, for any investor who is rolling over the $387.50 strike price put expiring March 14, their net return is as follows:
Purchase price = -$6.15
Premium received = +$7.03
Rollover net credit: $7.03-$6.15 = +$0.88, plus original credit of +$3.65 = net credit received = $4.53
This means that an investor now has received $453 on an investment of $37,500, or a net return of 1.2%. Since the period covers the original investment three weeks ago plus another 34 days, or 7 weeks total, the annualized expected return is as follows:
21 days + 34 DTE = 55 day investment period;
365/55 6.63 x 1.2% return = 7.956% annualized expected return
That is much better than the stock's annual dividend yield of 0.83%. Nevertheless, it still may not be better than just holding MSFT stock.
That is why sometimes it's better to not roll over an assigned short-put option position, even though in the short run there may be an unrealized loss.
Investors should carefully review these alternatives. One way to help you do this is to study the Barchart Options Learnings Center pages, including the Options Assignment section.
