from the desk of Dr. Terry F Allen

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The Dip in Microsoft (MSFT) Offers a Buying Opportunity

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Microsoft has dipped lower over the past few weeks, but several analysts think the broader outlook calls for more upside. Check out the following two articles which discuss the recent earnings report and how the pros outweigh the cons for MSFT investors – Microsoft revenue grew 13% despite coronavirus and Should You Buy Microsoft (MSFT) Stock?

Technicals

From a technical perspective, there are a few things that make MSFT attractive at current prices. First, there is a trendline in place that extends back to lows posted in April and the stock is seen bouncing from it. Further, this same trendline is intersecting with the $200 level which is seen as a support level. In addition to support confluence, there is a candlestick pattern on a weekly chart that suggests a bullish reversal may be taking place.

MSFT Chart August 2020 buy dip in all time high

MSFT Chart August 2020

If you agree there’s further upside ahead for MSFT, consider this trade which is a bet that the stock will continue to advance over the next five weeks, or at least not decline very much.

Buy To Open MSFT 4SEPT20 202.5 Puts (MSFT20084P202.5)
Sell To Open MSFT 4SEPT20 205 Puts (MSFT20084P205) for a credit of $1.08 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when MSFT was trading near $205.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $1.30 per spread.  Each contract would then yield $106.70 and your broker would charge a $250 maintenance fee, making your investment $143.30 ($250 – $106.70).  If MSFT closes at any price above $205 on September 4, both options would expire worthless, and your return on the spread would be 74% (844% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates August 1, 2020

IBD Underlying Updates August 1, 2020

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

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