Microsoft had a great session on Tuesday, rising 2% and is now back above the 50 and 200-day moving averages. Microsoft gave back just a fraction of that on Wednesday. Investors interested in taking some bullish exposure in Microsoft stock can do so with much lower risk with a bull call spread.
Create a bull call spread by purchasing a call and then selling a further out-of-the-money call. Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the December monthly calls, a 430-strike call option recently traded around $17.45 per contract. The 440 call commanded a premium of around $14.75.
Microsoft Stock: The Trade
Buying the 430 call and selling the 440 call would create a bull call spread. The trade cost would be $270 (difference in the option prices multiplied by 100), based on recent trading. This means the maximum potential profit would be $730. Get that by taking the difference in the strike prices, multiply that by 100, and finally subtract the premium paid.
A bull call spread is a risk defined strategy, so if Microsoft stock closes below 430 on Dec. 20, the most the trade could lose is the $270 premium paid. Potential gains get capped above 440. So no matter how high Microsoft stock might go, the most the trade could profit is $730.
The break-even price for the trade in Microsoft stock is equal to the long call strike plus the premium, which in this case would equal 432.70. In terms of trade management, if the stock dropped below 415, or if the spread value dropped from $270 to $130, I would consider closing early for a loss.
According to IBD Stock Checkup, MSFT stock ranks No. 1 in its group and has a Composite Rating of 76, an EPS Rating of 93 and a Relative Strength Rating of 52.
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Watch This Risk
The Redmond, Wash., firm is due to report earnings on Oct. 30. This trade harbors earnings risk if options in Microsoft stock get held through then.
Recently, the cloud computing, enterprise software, gaming and AI tech giant announced a 10% increase in its quarterly dividend, raising it to 83 cents per share, alongside a new $60 billion share repurchase program. This move reflects strong confidence in the company's cash flow and financial health.
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
