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Ride Microsoft Corporation (MSFT) Stock to Breakout Gains

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Like many tech stocks, Microsoft Corporation (NASDAQ: MSFT ) is finally on the move. Microsoft stock suffered a more modest setback than most technology stocks in the wake of Donald Trump's unexpected win in the November elections, but the losses still were there.

Microsoft Corporation (MSFT) Stock Is Steady, Not Sexy

Source: Mike Mozart via Flickr (Modified)

Now, though, MSFT shares appear ready to put the election behind them. And with sentiment improving, there is plenty of upside to capture.

There haven't been any major headlines for Microsoft stock in the financial media, but the shares eclipsed an important technical milestone last week. Following Microsoft's most recent quarterly earnings report, the shares were rebuffed by resistance in the $61-$61.50 region. MSFT would retest this resistance three more times in November, only to be sent packing.

On Friday, Microsoft finally blew past this hurdle following yet another successful retest of support at its 50-day moving average. The move above $61.50 was a victory for bulls that should lead to additional gains, barring any complications with this week's Fed decision on interest rates.

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Turning to the sentiment backdrop, MSFT stock enjoys a bullish outlook from Wall Street analysts. According to data from Thomson/First Call, 24 of the 35 brokerage firms following Microsoft stock rate it a "buy" or better, leaving a little wiggle room for additional upgrades from the remaining holdouts.

Additionally, there also is room for improvement on the price-target front. Currently, the consensus 12-month price target rests at $64, representing a meager premium of only about 3.2% to Friday's close. Upgrades or price-target increases could bring additional buyers to the table for Microsoft stock.

This bullish outlook doesn't carry over into the options pits. Currently, the January put/call open interest ratio for MSFT stock rests at 1.23, with puts easily outnumbering calls among near-term options. With Microsoft stock breaking out above $61.50, I would expect this ratio to shift lower in the coming month, as traders move away from protection and into a more bullish stance. Such a shift should be bullish for Microsoft.

Overall, January implieds are pricing in a potential move of about 3% for MSFT over the next month. This places the upper bound near $63.75, while the lower bound lies at about $60.05.

To address this, I have a pair of trade ideas.

2 Ways to Trade Microsoft Stock

Call Spread: While the heavy put bias in the options pits could be a concern, this is most likely protectionist trading in the wake of the election and should shift back toward calls in short order. This shift should bring buying pressure, adding to the technical buyers already eyeing Microsoft stock.

As such, bullish traders might want to consider a Jan. 20, 2017 series $62.50/$65 bull call spread. At last check, this spread was offered at 80 cents, or $80 per pair of contracts. Breakeven lies at $63.30. A maximum profit of $1.70, or $170 per pair of contracts, is possible if MSFT stock closes at or above $65 when these options expire.

Put Sell: On the other hand, premiums and options strike availability could make returns on this call spread a bit difficult. As such, traders may want to follow the lead of many others and open a put sell position. Along those lines, a Jan $57.50 put sell has a good chance of finishing out of the money. At last check, the $57.50 put was bid at was bid at 30 cents, or $30 per contract.

As long as MSFT stock trades above $57.50 through January expiration, traders pursuing this strategy will keep the $30 premium. However, if MSFT trades below $57.50 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $57.50 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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