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Apr 2 2011  / Microsoft Stock Symbol - MSFT
Purchase Microsoft Stock

VS Selling Microsoft Options

The Ultimate Utility Stock

 

Selling Microsoft Options - The Ultimate Utility Stock

More than a decade ago I contemplated whether to purchase Microsoft stock.  I had been following Microsoft stock prices for over a year and often contemplated buying Microsoft stock. Below is a chart I made in 2003. I noticed that Microsoft had a mean average price around the $25.00 range. If I was going to purchase Microsoft stock it would be at or below $25.00. However I was looking for a long range position and wanted Microsoft stock to be a core holding in my portfolio for a number of years. Being an option investor I also had plotted the options for many months and what I noticed was that Microsoft typically had volatility above 20 percent. Yet the stock did not go anywhere. In April 2003 I could have bought Microsoft stock at $24.50. Instead I decide not to purchase Microsoft stock, but to sell Microsoft put options until I was assigned shares. If shares were assigned I would then sell covered calls.

 

Within a year I had made 17% return on selling Microsoft put options and I still had not been assigned shares. The stock meanwhile had gone nowhere and it occurred to me that Microsoft was more a UTILITY stock than a tech stock. This giant of a corporation is an enormous cash machine with a multitude of products that generate significant profit margins but with a stock price history of being stuck in a range.

 

A utility company generally provides a steady increase in earnings year after year and they tend to trade in very narrow ranges with a slight bias to the upside. For example DUKE ENERGY CORP (DUK) could have been bought in April of 2003 for around $15.70. Today 8 years later it is around $18.00. With a nice stable dividend and a bit of capital appreciation, this is what most utility stocks should provide. It is the reason many people own utility stocks.

 

Looking at Microsoft stock prices in April 2003 I could had purchased Microsoft stock for around $24.50. Now 8 years later it is trading around $26.00. There has not been a significant change in Microsoft stock prices. But there is a significant difference between a utility stock like DUKE and a stock like MICROSOFT. It is VOLATILITY. If you look at the chart above you can see the volatility for Microsoft in pink and for DUKE Energy in blue, back in April 2003.

 

DUK is usually around 14% in volatility, whereas MSFT is usually around 22% and has many periods every year when it can average above 28%. This means that Microsoft Stock option premiums are far greater than DUK or most utility stocks. This makes Microsoft Stock a prime candidate for repeat selling of put options and excellent for my reverse naked put ladder strategy. It was obvious that there was no reason to purchase Microsoft stock.

 

Many investors continue to buy Microsoft stock waiting for that big move to $30 or $36 as most believe it is undervalued. Microsoft board of directors must also believe this as each year they continue to buy back their own shares, reducing the float of shares. Yet despite this the stock has stayed in a trading range since it did a 2:1 split in Feb 2003.

 

The chart below provides a Microsoft Stock Analysis for the past 8 years. This chart is well worth examining. Microsoft stock has spent most of the past 8 years trading within a range of between $28 on the high side to $23.00 on the low. By studying this chart I can derive quite a bit of information which will assist me. Here is what I can learn from the Microsoft stock analysis chart such as the one below:

 

1) I can sell Microsoft put options comfortably within that range although it is best to stay below $27.00.

2) I know that anytime the stock is over $28.00 it is overvalued and I would be better served by selling puts back within the trading range by going further out in time.

3) I can see that anywhere below $20.00 could be a good point to buy shares in lots of 100 so as to accumulate shares slowly when it is undervalued. However rather than purchase Microsoft stock I normally sell naked puts when it is undervalued as I can stay closer to at the money as the stock declines, making for very large put premium income.

4) The chart gives me great comfort when my naked puts get caught in the money, such as my July 27 naked puts which you can see here in my latest Microsoft Stock chart showing my trades. I know that I can continue to roll those naked puts and work my way lower and eventually they should end up out of the money.

 

It's a pretty simple trade staying within Microsoft stock's range over the past 8 years. I have only been assigned shares twice. Once in 2006 and and in fall 2008 during the bear market collapse. It became obvious early into this trade that there was no reason for me to consider a purchase of Microsoft stock. Instead through selling options I have not had a year when I earned less than double digit returns. Microsoft stock truly is the ultimate utility stock.  

 

Related Articles:

Microsoft Stock Analysis - Better Than Gold

The Microsoft Stock Report

 

You can view the last three years of my ongoing trades in Microsoft here.

 

Microsoft Corp  
Trades By Years
View MSFT-2011 Trades
View MSFT-2010 Trades
View MSFT-2009 Trades
Microsoft Articles

In The Money Covered Call
Trade Anatomy
Puts Better Than Gold
Ultimate Utility Stock
Put Ladder
Microsoft Stock Report
Using Moving Averages
 

 

Disclaimer: There are considerable risks involved in all investment strategies. Trade at your own risk.
Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed or presented are financial advice, trading advice or recommendations. Fullyinformed.com is a private website. Everything presented and discussed are the author's ideas and opinions only.
By using this site, you agree to be bound by its terms of use. The full terms of use can be read here. If you do not agree to the terms of use, do not use this site. The author of fullyinformed.com assumes no liability for topics and ideas discussed, errors and omissions, ads and their content and external links. Any corporate insignia used are registered trademarks of their respective company or corporation and are being used for identification purposes only. All material copyrighted by FullyInformed.com. Reproduction in whole or in part prohibited. Copyright 2008

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