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Microsoft Put Options Continue to Trade at High Levels, Attracting Income Players

Barchart - Sun Jan 22, 9:21AM CST
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Microsoft Corp. (MSFT) stock was down over 28% in 2022, closing at $239.82. So far this year it is up only slightly to $240.22 as of Friday, Jan. 20. Investors are waiting to see the company's Dec. quarter earnings due out on Tuesday, Jan. 24 after the market close. But one thing is for sure. The put option premiums for MSFT stock continue to offer attractive income plays and are attracting short-put investors.

I discussed this particular trade and the high put premiums for the stock a month ago on Dec. 23 in “Microsoft Put Options Premiums Are at High Levels, Worth Shorting for Income.” At the time, MSFT stock was at $238.19 per share, not far from where it is today. But the $210 strike price puts expiring on Jan. 27 were trading at $2.10 per share. That created a huge income opportunity.

For example, anyone who shorted those puts would have made good money as they are now trading between 20 and 38 cents per put option as of Friday. At the midpoint of 30 cents, the investor has a gain of $1.80 per put option.

In effect, investors' fears over the possibility of MSFT continuing to sink were overdone. The best way to play that is to sell puts to those that have these fears.

A Rollover Trade

This also means that the investor might want to roll those over to the next month and create an additional income short-put play to these fearful investors. The reason this might work is that Microsoft is not going out of business anytime soon

For example, investors project that earnings per share (EPS) will reach $2.32 for the December quarter, only slightly lower than the $2.35 it made in the prior quarter. Moreover, the cadre of analysts following the stock, expect MSFT EPS for the year ending June 30, 2023, will reach $9.53 and rise to $11.08 for the year to June 2024.

That puts the stock on a cheap 2023 forward multiple of 25.2x and 21.7x for 2024. These multiples are well below the historical average over the past 5 years of 28.17x forward earnings, according to Morningstar.

As a result, investors might want to look at shorting the Feb. 24 $215.00 put option, after closing out the Jan. 27 put option they made already made. It is always worth rolling over a trade before it closes worthless, as the opportunity to pick up extra yield in the next forward month is well worth the cost of leaving money on the table.

The $215 strike Feb. 24 put trades for $1.58 per put option at the midpoint as the Barchart chain option below shows (as of Friday, Jan. 20, 2023).

This means that the short-put investor who puts in an order to “sell to open” $215 strike price puts stands to make 0.735% over the next month. This assumes the stock does not fall below $215.00 per share (i.e., $1.58/$215.00). That represents an annualized yield of 8.8%.

This trade appears to be quite popular as the Barchart option chain above shows that there are 639 contracts in open interest (OI) at this strike price.

Even if MSFT stock falls to $215.00 and the investor must purchase the stock at that price his breakeven is still below that at $213.42 per share (i.e., $215.00 - $1.58 income received.) It also assumes that for some dramatic reason, MSFT will fall 11.1% from today's price of $240.22. That does not seem highly likely, especially given how profitable the company has proven to be over the years.

The bottom line here is that fears over Microsoft earnings due out on Tuesday are attracting short-put income investors.

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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.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.