Microsoft (MSFT) has seen some heavy selling in recent days but is holding nicely above the 50-day moving average.
Analysts maintain a positive outlook for MSFT stock with 41 Strong Buy ratings, 5 Moderate Buy ratings and 2 Hold ratings.
MSFT BULL PUT SPREAD
Today, we’re going to look at a bull put spread trade, but instead of using a regular monthly expiration, we will look at a longer-term trade.
Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.
As a reminder, a bull put spread is a bullish trade that also can benefit from a drop in implied volatility.
The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Implied volatility is currently sitting at 21.43% which gives MSFT and IV Percentile of 47% and an IV Rank of 14.27%.
To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.
If we go out to June 2026, we could sell the June 18 put with a strike price of $430 and buy the $420 put, which would create a bull put spread.
This spread was trading yesterday for around $1.40. That means a trader selling this spread would receive $140 in option premium and would have a maximum risk of $860.
That represents a 16.28% return on risk between now and June 18 if MSFT stock remains above $430.
If MSFT stock closes below $430 on the expiration date the trade loses the full $860.
The breakeven point for the bull put spread is $428.60 which is calculated as $430 less the $1.40 option premium per contract.
That breakeven price is around 17.10% below Monday’s closing price.
Conclusion And Risk Management
One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $140, so we could set a stop loss equal to the premium received, or a loss of around $140.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be if the stock breaks through the key level of $460, which is the current level of the 200-day moving average.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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