Javascript DHTML Drop Down Menu Powered by Drop Down Menu
FullyInformed.com - Options and Stock Strategies For Income

SignUp For Updates 

  You are here:


Bookmark and Share

 

 

 
Trade Anatomy
Charities Are An Industry
Fed Understatement - Defying Logic
A Personal Comment On RIM
Exxon - Patience Is A Strategy
VISA - Risk Against Reward
Microsoft- Reverse Put Ladder
Research In Motion - Not For Investing
Thank You Ben Bernanke
Greek Debt Crisis
Dividend Stocks That Cut Dividends
The Cautious Bull Strategy
Defensive Stock Investing

Spreads VS Selling Puts

Thank You Tax Man
What Next For Research In Motion Stock

Latest Microsoft Stock Report

April Options Results
Comparing The Bear Markets Of 2000 to 2003 and 2007 to 2009
Microsoft Puts Are Better Than Gold
Dance Near The Exit
How I Treat My Investing Like A Business
Microsoft - The Ultimate Utility Stock
The Value Of A Plan
Staying In The Game
It's All About Oil
Market Trend: Still Up - But Watch For June

 

Jul 7 2011 / Stock - Microsoft - MSFT

Microsoft Stock - Trade Anatomy

 
 

Microsoft Stock - Importance of A Plan, Goal and Objective

Back on July 5 I indicated on the forum I was back selling more puts on Microsoft at the $24 strike. I had a lot of capital to get back working since the upturn took place. Microsoft has been a wonderful stock for me over the past 10 years. On my site is the past 3 years of trades within Microsoft. Microsoft Stock Trades 2009; Microsoft Stock Trades 2010; Microsoft Stock Trades 2011

I sold both the August $24 and the September $24 strikes. As well I jumped in and bought 1000 shares and today I unloaded them for a quick 3% gain.

The chart below tells the story about this quick trade. The purpose of writing this is to show the technicals tools used to determine price points and timing to get into the trade and out of the trade. It is also important to mention that this was to be a short trade of no more than a few days at best. It is important to put in place PRIOR to the trade, what the plan is, the goal and objective. My PLAN was a short trade of only a few days at best and not over the weekend, the GOAL was 2 to 3 percent with a downside target of no more than $25.00 or a loss of about 3.8% or $1000 being acceptable as I have made a good return to date in my Microsoft trade. The OBJECTIVE was to hold the stock while it clung to the Upper Bollinger Band and wait for signal of overbought or see a trend stall or change which would be the timing signal to sell.

On the 27th of June the Stock took a big move higher and broke through the Upper Bollinger Band. Since then the stock has remained glued to the Upper Bollinger Band. It is solidly bullish. A good indication to buy the stock.

Microsoft Stock Chart - solidly bullish

 

On July 5 when the stock moved lower in mid afternoon, I sold my puts and bought the stock. I then added the HLC charting tool after working this past weekend with an investor friend when we wrote the 5 part article on his Cisco trade.I was impressed with using the HLC charting to follow the momentum in the stock when he did his Cisco trade. I applied it to my Microsoft trade to see how it might assist. I knew this would only be a trade for a couple of days (The Plan). I do not want to carry this trade beyond tomorrow (again THE PLAN). In the chart below you can see how all day the HLC showed buying activity near the high as the afternoon progressed. The third last indicator shows a closing right on the high, but then no follow through. I sold at that moment.

Microsoft Stock Chart - July 5 2011 to July 7 2011

Below are today's indicators (July 7 2011). I knew I did not want to carry this trade over the weekend (The Plan). I was looking for any weakness to sell my shares (The Objective). I am not a stock holder but prefer to trade the shares quickly and get my capital back. The trade was already up over 2% (The Goal)

The first clue was MACD. From the mid-morning it went negative and despite the rise in the stock as the day progressed it refused to go positive. You would have thought that all the buying in late afternoon would have pushed it back positive, but it only crossed for a brief few minutes and then went negative. I sold at that moment. Into the close MACD went more negative perhaps an indication of some selling tomorrow.

Here are the other indicators. A number of times the Ultimate Oscillator bumped up against overbought. By the mid-afternoon with the "closed on the high" on the HLC chart above, the Ultimate Oscillator flashed overbought. Momentum changed right after. Chalkin's Volatility shows the peak buying and then it dropped. 

Microsoft Stock Chart - July 7 2011 - Technical Indicators

This is not an indication that the stock is due to "correct", but it may have more difficulty climbing higher from here. While it probably will climb higher, Microsoft's stock may now find any move higher is not going to happen as quickly. In other words the big jump from oversold back at the end of June, is over. You can see this trade here, in the overall Microsoft chart for the year.

SUMMARY

I have lots of puts in Microsoft and plan to keep working those positions. I will add more as the opportunity arises and close early if premiums collapse. Meanwhile though it has been a great stock. Imagine. I started right after the tech bubble burst in 2000. It has been 11 years of annual double digit returns. You can see how easy sometimes a trade can be when the Plan, Goal and Objective are laid out clearly in advance of the trade. These simple parameters can be applied to any trade to remove emotion and attain success either through a profit or to control any loss.

Question From A Reader

I didn't look at the minute by minute option prices, but I assume you could have bought Jul $15 deep in the money Calls and gotten similar (or better percentage) results. Why did you buy stock instead?† It's not like you were going to hold it for a long time, so premium erosion wouldn't come into play. Question From Bill.

Thatís a good question Bill. The reason is pretty simple. The call may have returned slightly better than the stock however in a downturn I always feel the stock is better than the call. The call can lose more value than the stock and the stock has other possibilities available to rescue the trade should the stock take a tumble beyond my loss ceiling.

I have the capital available to buy the stock. Whereas for other people with less capital purchasing the calls may make sense. I have found though, that many people over extend when it comes to calls (and puts) just due to the price. With the stock at $25.99 the cost for 1000 shares is about $26,000. To purchase the deep in the money $15.00 call was $11.15 for $11,150.00. I have seen a lot of investors step up and buy 15 call contracts because the cost is still just $16,725.00, considerably less than my $26,000.00 in purchase. However if the stock tumbles, they either end up getting out with a larger loss if they close as now they are closing 15 contracts rather than 10, or they exercise on more shares than they wanted.

As well, just a personal observation, it is surprising how many investors talk about buy deep in the money calls, but when it comes to laying out $11.15 per contract, they decided to move higher, say perhaps the $20.00 and pay a little bit more premium for the call. This begins to negate the value for purchasing a deep in the money call in the first place.

It again comes down to the plan, goal and objective. I am pretty conservative with my plans. I like to control risk as much as possible and I have had great luck over the years with buying stock versus buying calls. While the technicals told me the stock was moving higher, there is never a guarantee. You would be surprised at how often I have bought stock for a quick jump only to see the stock bump up and then sell off. In my case, Microsoft began the uptrend on June 27. I didn't buy in until July 5. The rally could have stalled on July 6 and ended on July 7. Nothing is foolproof so I hate making a trade, "hoping" it will work out. I sleep nights because I have already put in place my strategy in the event the trade turns against me.

In my plan if the stock fell to 25 I would be out. The loss would be 3.8%. As well, if the stock moved from 25.99 to perhaps just 26.10 and I decided to sell as it is a short term trade, time is against the call, especially a July call set to expire in a week's time.

While this next comment would not be as much an issue for a $15.00 strike call, I think it is worth mentioning. Calls had a lot of premium when the stock commenced moving up. Volatility in the overall market was higher at that time. However as the stock climbed and volatility decreased not just in MSFT but the entire market, the call premiums fell. So if the stock didnít move very much in the two or three days I was willing to be in the trade, then the call could actually lose value whereas the stock would still present either a breakeven or a small profit.

For short trades I prefer the stock. I think everyone has a level that they are good at when it comes to investing. Mine is selling puts, covered calls and buying and selling stock. It is only once in a while when I buy calls.

Buying calls in this case would have worked out, but of course hindsight is great. I always plan for both scenarios Ė a profit and a loss. I find the loss easier to control or rescue with the stock. Options can really tumble or grow in value quickly if an unforeseen event happens and I just never know when that is going to be the case. With selling puts, if an unforeseen event happens, such as the Lehman Brotherís default in 2008, and I get suddenly assigned I am happy with my position as I know I can work my way out of it. However with calls I can exercise and take the shares but I am out the share price where I exercised and the price I paid for the call option to begin with. Thanks for your question.

 

 
 

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

 |  site map  |  privacy policy  |  contact me  |  subscribe  |  exchange links  |  the author of fullyinformed  |