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Microsoft - A Compelling Trade

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One of my favorite spaces to be in is tech. The group has underperformed relative to the S&P, although the companies are focused on investing in growth, sport stellar balance sheets and represent very attractive valuations. For those of you that follow me, it has been a consistent theme in all of my content on OP and in the webinars and classes I teach. My key areas of focus are service/analytics, cloud, data storage and cyber security. During my webinar with Jon DRJ Najarian on Monday, I expressed that view with a synthetic call in the Technology Select Sector SPDR (XLK), which is something that Skip and I have traded in and out of several times. MSFT is one of the top 10 holdings of that ETF.

Recently, MSFT announced an acquisition of InCycle Software's release management solution business, which will strengthen MSFT's ALM and DevOps solutions with Release Management capabilities thus allowing customers to create and deliver applications at a much faster rate. Further, MSFT can enhance its developer offerings and create its own apps in the future. This clearly falls inline with my area of focus.

We have also seen some nice, bullish activity in the options market. In recent trading, an investor bought 6,200 January 40 calls for $0.60 when the stock was just under $36, expressing the expectation of a robust rally into year's end. If this bullish call activity is correct, shares have a nice opportunity to rise on a relatively cheap play, as vol is an attractive bet on this trade.

I would piggy back on this trade because it represents a nice risk/reward scenario. Keep in mind that you can lose 100% of the premium and entry and exit points are always contingent on your trading plan and capital availability. I typically trade spreads for the 100%, risk-controlled profile, but I think this is an attractive bet based on sound fundamentals, a solid balance sheet and my bullish bias on the sector. We can get involved just $0.02 above the price an institutional buyer got in that I mentioned above.

Trade: Buy to open MSFT Jan 40 calls for $0.62.

If you have any questions or feedback, please use the comments section below to reach out to Lindsey and I. Trade Well.

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