from the desk of Dr. Terry F Allen

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Wedbush Raises Price Target for Microsoft (MSFT) to $270

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.

Wedbush recently raised their MSFT price target to $270 from $260 and said they see potential for it to reach as high as $300. The following two article discuss the price upgrade and reasons why MSFT appears poised to grow – Microsoft will leap another 20% as cloud-computing strength drives strong earnings, Wedbush says and Microsoft: Still Not Fully Priced, Here’s Why.

Technicals

From a technical perspective, MSFT recently posted a bullish breakout above a horizontal resistance level at $225. This same level had capped rallies three times in the fourth quarter of 2020 and is seen as strong support in the event the stock pulls back further from here. There is also support at $231.15 which marks the late August high.

MSFT Chart February 2021 - Undervalued

MSFT Chart February 2021

If you agree there’s further upside ahead for MSFT, consider this trade which relies on the stock remaining above $230 through the expiration in five weeks.

Buy To Open MSFT 05MAR21 225 Puts (MSFT210305P225)
Sell To Open MSFT 05MAR21 230 Puts (MSFT210305P230) for a credit of $1.73 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when MSFT was trading near $232.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $171.70. This reduces your buying power by $500 and makes your investment $328.30 ($500 – $171.70).  If MSFT closes at any price above $230 on March 5, both options will expire worthless, and your return on the spread would be 52% ($171.70 / $328.30), or 593% annualized.

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

IBD Underlying Updates January 30, 2021

IBD Underlying Updates January 30, 2021

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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