Microsoft stock has been in my portfolio for a period that seems forever. For my online portfolio it has been traded since 2009. Microsoft Stock for me is without a doubt one of the gold mines of profit generating stocks. While Microsoft Stock may appear to not do very much over the years, my Put Selling and handful of stock trades has returned an impressive double digits annually.
Recently the stock received a number of big boosts including the stepping down of CEO Steve Ballmer which many investors saw as a positive step for Microsoft Stock.
Microsoft Stock downgraded to Underperform
This morning (Nov 18) Bank of America Merrill Lynch downgraded Microsoft Stock to underperform. Analysts change their ratings on stocks as often as the weather changes. What many investors find puzzling is why one rating agency can have an outperform on a stock and another an underperform.
For example just 2 days ago 3 analysts rated Microsoft Stock as underperform, 15 rated Microsoft Stock a hold, 4 rated it a buy and 6 rated it a strong buy.
3 Days ago S&P Capital released a report in which they placed a hold on Microsoft Stock and gave it a target of $36.00 at a time when the stock was trading at $37.84. A lot of investors find this type of rating more the just puzzling. In their report they wrote they expected a 6.2% rise in 2014 revenues and 6.2% rise in 2015 revenues. If this does happen wouldn’t the stock move higher just based on normal PE ratings?
What To Do With Analysts Ratings
When analysts rate stocks I look to see if there was much movement, up or down and if it presents an opportunity. To do that I need to know where the support is in a stock.
Microsoft Stock Support Levels
For Microsoft stock the best areas of support over the past 6 months can be seen in the chart below. The three areas include $37 which has light support but nonetheless it has managed to hold $37 for 9 trading days and bounced off of $37 twice during that period building more support with each bounce.
The next level of support is at $35.30. This level has reasonable support in the stock.
Below the $35.30 support we can find stronger support at $34.25. That price range built up a lot of support after the April 22 announcement by ValueAct Capital Management that they had purchased $2 billion worth of shares. On the day of the announcement Microsoft stock was trading at $30.83 and the stock push up to around $36.50 by mid July. It was the quarterly earnings in July that trounced the stock by 10% on July 19.
With 3 sets of support levels at present valuations, an investor interested in Put Selling could actually lay out what I call a Put Selling ladder. Each rung of the ladder as one climbs down allows the investor to place more capital at risk. What this does is allow the investor to bring in very good premiums but protect the overall trade in the event that the stock falls further than anticipated.
For example with Microsoft Stock at present (Nov 18) following the downgrade by Bank of America Merrill Lynch, an investor who would like to risk $42,000 in selling put contracts against Microsoft stock could sell these puts for Dec 21 options expiry:
Sell to Open – 3 $37 put strikes for .96 cents = total capital committed = $11,100.00 – income earned = $288.00
Sell to Open – 4 $35 put strikes for .36 cents = total capital committed = $14,000.00 – income earned = $144.00
Sell to Open – 5 $34 put strikes for 23 cents = total capital committed = $17,000.00 – income earned = $115.00
Total capital at risk = $42,100.00
Total income earned = $547.00
Return = 1.3%
If assigned on all positions, cost basis would be 1200 shares / $42100 = $35.08 less income earned of $547 = break even of $34.62
Benefits Of The Put Selling Ladder
By selling a variety of puts monthly in this put selling ladder fashion at support levels, I have provided myself with decent support, a very good cost basis of $35.08 should something happen and I end up being assigned on all the shares and an excellent break-even of $34.62.
With a return of 1.3% if repeated monthly, I can earn 15% in a year. If I take the earnings and compound them by taking my annual income and rolling back into the Put Selling ladder and continue selling puts in this fashion I can conceivably double my capital in about 4 years and 2 months.
The put ladder then is an excellent strategy for earning income while at the same time providing superior protection against a move lower in Microsoft Stock that is not anticipated or expected.
Microsoft Stock Downgraded Opportunities
Opportunities abound everywhere when trading in stocks. What one analyst sees as an outperform and another sees as underperform I see as opportunities for additional profits. Each of these changes by analysts drives volatility higher in the stock which is what keeps the option premiums worthwhile for investing against.
The downgrade this morning on Microsoft Stock is another opportunity for decent profits through Put Selling with a put ladder that can provide superior protection as well as decent profits. To read more on the Put Selling ladder strategy select this link.
Microsoft Stock Internal Links
Index of Microsoft Stock Articles
Microsoft Stock External Links
Microsoft Stock Investor Relations
Microsoft Stock Financial Statements