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Microsoft (MSFT) has shown good relative strength over the last few months and is holding nicely above a rising 50-day moving average.
In the third quarter of 2024, Microsoft reported revenue of $61.9 billion, a 17% increase from the same period the previous year.
Operating income rose by 23% to $27.6 billion, while net income reached $21.9 billion, up 20%. Diluted earnings per share were $2.94, marking a 20% increase.
The Barchart Technical Opinion rating is a 16% Sell with a Weakest short term outlook on maintaining the current direction.
Rather than just buying the stock, savvy traders can use the options market to find smart ways to trade Microsoft stock without risking too much capital.
Today, we’re going to look at a couple of bull call spread trades on Microsoft stock.
Here are the parameters for finding some bull call spread trade ideas on MSFT.
- Symbol equals MSFT
- Break Even Probability above 40%
- Moneyness -10% to 0%
- Days to expiration 30 to 150
Here are the results of that particular screener:
Let’s analyze some of these ideas.
Bull Call Spread 1: January $435 – $440 Bull Call Spread
As a reminder, A bull call spread is a bullish defined risk option strategy. To execute a bull call spread an investor would buy a call option and then sell a further out-of-the-money call.
Let’s use the first line item as an example. This bull call spread trade involves buying the January expiry $435 strike call and selling the $440 strike call.
Buying this spread costs around $2.45 or $245 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
5 – 2.45 x 100 = $255.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 104.08%.
The probability of the trade being successful is 41.0%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
The spread will achieve the maximum profit if MSFT closes above $440 on January 17. The maximum loss will occur if MSFT closes below $435 on January 17, which would see the trader lose the $245 premium on the trade.
The breakeven point for the Bull Call Spread is $437.45 which is calculated as $435 plus the $2.45 option premium per contract.
Bull Call Spread 2: April $435 – $460 Bull call Spread
The next example is on the second line and involves buying the $435 April 17 call and selling the $460 call.
Buying this spread costs around $11.00 or $1,100 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
25 – 11.00 x 100 = $1,400.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 127.27%.
The probability of the trade being successful is 40.0%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
Mitigating Risk
With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.
For a bull call spread, setting a stop loss of 50% of the premium paid is a good idea. In the first MSFT example above, that would be a loss of around $120. For the second example, the stop loss would be around $550.
Traders may also consider a stop loss if MSFT breaks below the 200-day moving average, currently around $420.
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.
