Investors Are Still Keen on Microsoft Stock, Making Short Put Plays Popular

Microsoft (MSFT) is one of the few tech stocks that has moved higher after the company released its Q4 earnings after hours on Jan. 24. As of Feb. 28, it was trading at $250.10, up from $240.01 on Jan. 25. This stability in the MSFT stock price has made shorting its out-of-the-money puts popular with value investors.

For example, in our last article on Jan. 29, we discussed how Microsoft's massive free cash flow and buybacks keep investors interested in the stock for the long term. 

Since then, Microsoft says it is integrating its new AI chatbot, the new Bing, into its Windows 11 operating system search box. That could help make its products even more popular.

One way to play this until the next earnings come out, and to increase the stock's low 1.09% dividend yield income, is to short near-term out-of-the-money (OTM) put options.

Shorting OTM MSFT Puts

For example, in the Jan. 29, 2023, Barchart article on Microsoft, we wrote that investors were shorting the March 3 expiration $230 puts. There was a large amount of volume in those contracts. A month ago those were trading for $2.16 per put option, a juicy premium that investors could short. 

At the time, this worked out to almost 1% (i.e., $2.16/$230 = 0.94%) and an annualized rate of 11.26% if it can be repeated each month.

Sure enough, as of today, those $230 strike price puts due March 3 are now trading for just 2 cents at the midpoint. That means investors who shorted those puts have made $2.14 of the $2.16 that they sold on Jan. 29. 

So now it probably makes sense to short OTM MSFT puts again, possibly closing out the Mar. 3 expiration trades for a small purchase of 2 cents. For example, the Mar. 31, expiration $230 strike price puts trade for a similar price of $2.15 per contract. 

This means that an investor who secures $23,000 in cash and/or margin with their brokerage firm, can enter an order to “Sell to Open" the $230 strike price put. The account will then immediately receive $215.00. That works out to a 0.934% (i.e., $215/$23,000) and is a similar annualized return as last month's puts. 

It also means that investors will continue to make good income unless MSFT falls by at least 8% to the $230 strike price. And even then, the breakeven point would be $227.85 per share (i.e., $230-$2.15).

Moreover, these contracts are also very popular with investors given that there are now over 1,000 puts at this $230 strike price, as can be seen in the table above.

However, in case investors are worried about a dip in MSFT stock they could also short the $225.00 strike price puts. These pay out $1.51 per contract, which works out to a very good yield of 0.67% (i.e., $1.51/$225). That is equal to an annualized 8.0 return if it can be repeated each month.

The bottom line is this. I have been following up on several articles on Microsoft OTM short-put plays to show that they provide additional income to long-term MSFT stock shareholders.

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