Jul 13 2011 /
Stock - Microsoft - Stock Symbol - MSFT
In The Money Covered Call Earns 3.0%
This 1 Month Trade Can Earn 3.0% And Has
Earlier on July
7 I wrote about my
Trade Anatomy showing how I earned
3% on Microsoft for a few days of work.
While to me it wasn't much work, many
investors find picking the moment to buy
and sell based on
technical indicators, tough to
For those investors here is a Microsoft
stock trade that is perhaps much easier
to put in place and possibly understand.
Yesterday I bought 2000 shares of
Microsoft Stock. Today I sold in the
money covered calls for August 20 expiry
which if I am exercised will earn about 3.0%
or if I captured the August dividend
If on the other hand the stock falls I
have 6.45% downside protection. There is
a lot to like about this
Microsoft has had a nice run up after June 27. This
was the first move
where I earned 3%.
In order to
earn another 3% in Microsoft stock, it would have to run
up about another .80 cents from around $26.50. I
believe Microsoft will move higher over time, but protecting
my capital is also important. I could just buy some
calls and hope they work out, but options are a
wasting asset as they have an expiry day, which is
why I enjoy selling options so much.
Instead looking at the chart, yesterday I noticed
that even with all the selling of the past two days,
Microsoft held up very well. Therefore in
yesterday's weakness I bought 2000 shares at $26.42.
The stock is trending sideways but staying about the
mid-point of the Bollinger Band, which is a good
sign. The 10 day is widening but beginning to show
signs that the next move may be sideways in
After purchasing my shares on Tuesday Jul 12 2011,
here is what I saw at the end of the day: The
overbought condition is disappearing. Momentum is
waning although the stock has not fallen much from
$26.98, the high in the latest run up. MACD is also
waning as it had higher readings a few days earlier
and each day the divergence rating has been falling,
but remains positive.
Volume is now back to low. All of these signs
indicate the latest run-up has stalled. As I believe
Microsoft has more upside potential over the next
few weeks or months, I would like to
get into the stock and enjoy another decent return
over the next four weeks and then move out.
I believe the downside to be probably around the
$26.00 level in the short term should the NASDAQ
take a tumble lower for a few sessions to a few
I don't believe the market is going to crash,
but as I indicated in my
market direction call last night RAZOR'S EDGE, July
12, I do believe the S&P500 could try to retest the
200 day moving average, although 1310 to 1300 marks good support
right now. A move of the S&P to 1300, would pressure
the NASDAQ and could push Microsoft
back to $26.00 or about 1.6% lower. However a move below
the 200 day moving average could see Microsoft back
to perhaps $25.00.
I am, as you know
a cautious bull, this year. Therefore protection
is important as well. As I indicated last night in
my market call, I believe there will be a bounce as
selling was quite large on Monday. Today we got that
bounce and options immediately moved higher. I
zeroed in on the in the money covered call at the
$25.00 and $26.00. To mention of interest, the
put values are lower as the market maker obviously
feel the stock is in an uptrend and they are asking
higher premiums for the calls. This is part of the
reason I liked the In The Money Covered Calls for
I put in my offer to sell 10 calls for August 20, $25
strike for $2.10 and waited. With the morning jump I
got filled at $2.12, which was just excellent. The
extra 2 cents will pay the commission cost.
I put in my offer to sell 10 calls for August 20, $26
strike for $1.33 and was filled at $1.34.
Interactive brokers is often just great at getting
me the best fill they can and this time was no
Some investors would prefer the $27.00 which would
provide a decent profit for August plus some capital
gain. But at around .72 cents my protection would
basically be a break even on the stock.
The $26 was compelling as it offered 3.5% return for
the month, and 5% downside protection.
The $25 earns 2.5% and has 7.9% protection. These
are perfect for my strategy. Remember
that I have already made 10% this year with my
investments, and now I am just trying to earn that
remaining 2% to meet my goal for 2012.
Here are the figures:
Total Capital At Risk - $52,847.00
Number of Shares - 2000
Covered Call Income Earned - $3421.00 Cost Basis in the stock - $52,847 - $3421.00 =
$49,426.00 /2000 shares = $24.71
To see how the break-even price point measures up,
below is the 1 year Microsoft Stock History chart
from July 2010 to July 2011. $24.70 marks what I
think is an excellent price point to end up in the
stock should the trade not work out and the stock
fall dramatically back in the next month.
On more thing to point out is the possibility of
earning the August dividend. If the stock is above
$26.00 I would think I would be exercised when the
dividend is paid out, possibly around August 17th
(X-Dividend Date last year). I could also if the
trade is working and the stock is about $27.00,
consider rolling the calls out to September if
premiums warranted it which should then capture the
SCENARIO 1: - Exercised August 20 at $25 and $26
Trade will earn:
Original Capital invested - $52,847
Capital returned if exercised - $50980.00
Covered Call Income - $3421.00
Total Profit = $1554.00
Return = 2.9%
SCENARIO 1: With Dividend Income
Total Profit = $1874.00
Return = 3.5%
This trade could be put in place by any investor
with smaller capital and still earn a decent return.
Perhaps 200 shares for August 25 and 200 for August
26. With volatility higher in Microsoft right now,
call premiums are up as the stock is trending up and
analysts are jumping back into Microsoft with some
calling for the stock to head to $38.00 over the
next few months.
I think such predictions should be ignored and
instead for those investors interested in owning and
benefiting from Microsoft Stock's latest uptrend,
stay with in the money covered calls as long as
premiums provide a decent return and I believe
anything over 2% for a month is an excellent return.
The whipsawing action of the NASDAQ provides these
types of opportunities for those investors willing
to take the plunge. I have a lot of confidence in
Microsoft Stock and the company. It has been a
favorite stock for 10 years and I am sure it will
still be a favorite 10 years from now.