Here's Why Microsoft Is Due for a Correction
Microsoft (MSFT) - Get Report gapped well above resistance last week, a strong bullish move. But the signals caution that a retracement is likely to follow.
Resistance was at about $53 per share, a level set back in March when that was the price of support. A flip took place by late May and helped. However, in mid-July, price ventured higher, only to set up a large gap. At the same time, Relative Strength Index moved above the index value of 70, a signal that the stock is overbought.
Anyone holding shares of Microsoft may expect to see a retracement in the coming sessions. With this in mind, the timing could be excellent for a covered call. Another possibility is a variable ratio write.
For example, if you own 300 shares, consider opening two short calls at one strike, and another two at a higher strike. This sets up a ratio of 4:3. One of the calls is not covered, but the higher strike gives you flexibility to avoid exercise if the price does move further upward. Setting a short-term expiration ensures that times value will decline rapidly.
For example, the August 5 weekly options, expiring in 11 days, present the ideal situation for a variable ratio write. Right after today's open, we looked at the 57 call, bid at 0.47. Two of these will yield $94 less trading cost of about $9, netting at $85. And the 57.50 call bid 0.32. Two of these yield $64, less $9 for trading costs, a net yield of $55. The combined net from this position is $140.
If the stock price remains below $57 per share, all of these calls will expire worthless. If the price begins moving above, any of these can be closed to avoid exercise, or rolled forward. With rapid time decay, the chances favor this short position.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
Besides blogging atTheStreet.com,Michael Thomsett alsoblogs at theSeeking Alphaand several other sites.He has been trading options for 35 years. He also teaches on the Candlestick Forum website. To check membership, go to Candlestick Forum membership. His new book can be viewed at tinyurl.com/z44kzlu