Microsoft stock versus selling Microsoft Stock put options makes an interesting study. 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 stock 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 stock 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. After paper trading stock versus put selling on Microsoft stock for about two years, I decided not to purchase Microsoft stock, but to sell Microsoft stock put options until I was assigned shares. If shares were assigned I would then sell covered calls to be exercised from the stock and then repeat the strategy.
This Microsoft Stock chart shows that the volatility is higher than a true utility stock, but the stock trades more like a utility stock than a tech stock within a defineable range.
Within a year I had made 17% return on selling Microsoft stock 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. Select this Microsoft stock link to learn more about their investor relations.
Microsoft Stock Acts Like A Utility Stock
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 stock) 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 Stock 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 stock 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 but instead to stay with my put selling strategy.
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.
Microsoft Stock Has A Very Defined Range
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.
This Microsoft Stock chart shows the defineable range the stock has been stuck in for years.
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. 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.
Microsoft Stock The Ultimate Utility Stock Summary
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 2004 and and in 2006. It became obvious early into this trade that there was no reason for me to consider a purchase of Microsoft stock. Instead through selling Microsoft options I have not had a year when I earned less than double digit returns.
Microsoft stock will eventually move higher. The company is a giant in the technology industry, has been reducing the number of available shares, has continued to increase its dividend, has a wide variety of products and new ones coming to the market. When Microsoft stock does rise I will then reassess my Microsoft stock options put selling strategy. Until then, Microsoft stock truly is the ultimate utility stock.
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