Analysts keep raising their price targets for Microsoft Corp. (MSFT) stock. Yahoo! Finance's survey now has a $572.92 price target, up from $567.20 last month, as I wrote in my Aug. 16 Barchart article on Microsoft.
One attractive play is to sell short out-of-the-money (OTM) puts, and another is to do a vertical put credit spread. This article will describe both plays.
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MSFT stock closed at $492.44 on Thursday, Sept. 10, down from its recent peak of $513.33 on Aug. 28.
MSFT stock - last 3 months - Barchart - Sept. 10 Moreover, it's still below my $554.85 price target based on its operating free cash flow (OCF) forecasts, management's capex plans, and a 2.0% FCF yield.
In addition, analysts surveyed by AnaChart now have an average $563.05 price target, up from $560.20 last month.
MSFT has also been flat for the past month. That sets up ideal conditions for investors who short out-of-the-money (OTM) put options.
The bottom line is that MSFT stock still has good upside. As a result, it makes sense for some investors to sell short cash-secured OTM puts.
Shorting OTM Cash-Secured MSFT Puts
Last month (Aug. 14 Barchart article), shorting the $475.00 put option expiring Sept. 18. At the time, MSFT was at $495.20, so the put strike price was 4% below the trading price.
Short sellers collected a $7.03 premium on this put at the midpoint. That gave them an expected yield to expiration of 1.48% ($7.03/$475.00), with a low delta ratio of -0.27. That implies there is only a 27% chance that MSFT would fall to $475.00 by expiration.
Today, the premium is down to $2.06, and the delta ratio is much lower at -0.18. It might make sense for some investors to roll this over, especially since the short-put yield is only 0.4336% and there are only 8 days to expiry (DTE).
For example, for the Oct. 16 expiry contract period with 35 DTE, the same $475.00 put strike price has a higher midpoint premium of $8.30 (compared to $7.03 last month).
That means short-sellers of these puts can collect a higher one-month expected yield of almost 1.75% (i.e., $8.30/$475.00 = 1.747%).
MSFT puts expiring Oct. 16 - Barchart - As of Sept. 10, 2026 This means an investor who secures $47,500 with their brokerage firm can collect $830.00 immediately in their account after entering an order to “Sell to Open” this contract.
Moreover, given this high premium, the breakeven point, even if MSFT drops to $475.00 and the account is assigned to buy 100 shares, is:
$475.00 - $8.03 = $466.97 breakeven (B/E)
That's 5.17% below yesterday's close, providing good downside protection. Moreover, even if that occurs, the potential upside is almost $100 higher, or +20%:
$563/$466.97 -1= +20.67%
The only downside is that if MSFT drops below the B/E point, an investor will own 100 shares of MSFT with an unrealized loss. At that point, the investor can hold on until MSFT rises, or sell covered calls to help mitigate this unrealized loss.
The worst that could happen with this play is that an investor buys MSFT shares at a discount.
Short Put Credit MSFT Spread - Ideal for Investors with Limited Funds
For many investors, posting $47,500 in collateral with their brokerage firm for one trade is too much. One way around this, with significantly higher risks and returns, is to do a put credit spread, sometimes called a vertical or bull put credit spread.
Here is how this works. The investor enters an order to “Sell to Open” 1 put at $475.00, but simultaneously enters an order to “Buy to Open” 1 put at a lower strike, say 460.00.
This means the $830 credit received pays for the $475.00 purchase of the $460 put, for a net credit of $355.
But now the investor has to post just $1,500 in collateral for the trade (i.e., $475-$460) x 100 = $1,500). That makes this short-put play much more affordable.
Moreover, the overall projected return is very high:
$355/ $1,500 = 23.67% over one month
However, the risks are much higher. The worst that could happen is that the investor could lose a net amount of $1,145 (i.e., $1,500 collateral less net credit of $355).
That occurs if MSFT closes at $460.00 or lower by Oct. 16, a 6.5% drop from yesterday's close.
So, an investor can play MSFT with this short play and make a return commensurate with the buy-and-hold upside with much lower capital requirements. But they also have much more risk.
On the date of publication, Mark R. Hake, CFA 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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