Low-cost puts and an expensive stock arrange for a put play in Microsoft (MSFT).
Each the S&P 500 and NASDAQ 100 closed right at recent highs on Friday. The equally weighted S&P 500 and NASDAQ 100 still have a approach to go before nearing recent highs, nevertheless.
The mega-cap stocks like Apple, Nvidia and Microsoft have been the large outperformers this yr which accounts to the divergence between cap weighted QQQ and equal weighted QQQE.
Friday, though, finally showed some struggles for a few of these mega-cap names even with the indices closing higher. Microsoft (MSFT), one in all the mega-cap leaders, was actually down with each the S&P 500 and QQQ sharply higher.
Has the time arrived to start to fade the rally in these red-hot names? Let’s take a have a look at Microsoft using the POWR Options process to see if the manic melt-up could also be beginning to stall in MSFT.
POWR Options likes to make use of a mixture of fundamental and technical evaluation together with taking a look at implied volatility to uncover trade ideas which have a probabilistic edge. This fusion approach helps put the percentages in your favor. No guarantee (that is trading, in any case) but an edge.
Let’s take a fast walk through the approach using Microsoft for instance.
Valuation
Microsoft stock is getting pricey once more on a valuation basis. Current Price/Sales (P/S) ratio now stands at the best level this yr and the best since January 2022.
This though the 10-year Treasury yield remains to be over 4% and the Fed Funds rate is at 5.25% to five.5%. Back in January 2022 (the last time MSFT carried such lofty multiples) the Federal Reserve hadn’t even begun to lift rates off zero and the 10-year yield was at just over 1.5%.
To me, such historic increases in rates of interest should dampen valuation multiples in a major way. Plus, a 2.78 trillion dollar market cap company like Microsoft carrying a virtually 13x P/S ratio is difficult to justify since growth rates will necessarily be lessened simply because of the law of huge numbers.
Technicals
MSFT stock can also be showing some weakness (finally) from a technical perspective. Shares are struggling to interrupt past the $380 area. 9-day RSI reached an extreme at 80 but has since fallen back to 56. Bollinger Percent B exceeded 100 and is now at 61. MACD also reached an extreme but just generated a sell signal by going negative. A break below the 20-day moving average could lead on to further downside because it has done prior to now.
Implied Volatility
Implied volatility (IV) is hovering at the bottom levels of the past yr. This implies option prices are low cost. A yr ago, the 75-day at-the-money puts were trading at just over a 30 IV. Now the identical 75-day at-the-money puts are trading at only a 23 IV.
(*3*)
To put the puts in perspective, the MSFT $255 puts were priced at $13.10 on 12/4/2022 with MSFT stock at $255.02. Now, similar $375 puts are priced at $14.40 with MSFT stock at $374.51. So, the 75-day puts are only $1.30 higher now though Microsoft stock is $120 points higher! The proportion cost of put protection-and put prices-has dropped considerably to say the least. From over 5% a yr ago to under 4% now.
That is the trade idea generation process we use on a each day basis for the POWR Options Portfolio. Mix fundamental, technical and implied volatility evaluation in a fusion format.
Investors and traders alike will want to look to purchase puts on an overvalued and overbought MSFT stock. The stock price hasn’t ever been this expensive and the put prices this low cost in a really very long time.
POWR Options
What To Do Next?
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All of the Best!
Tim Biggam
Editor, POWR Options Newsletter
MSFT shares closed at $374.51 on Friday, down $-4.40 (-1.16%). 12 months-to-date, MSFT has gained 57.55%, versus a 21.38% rise within the benchmark S&P 500 index throughout the same period.
Concerning the Creator: Tim Biggam
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His overriding passion is to make the complex world of options more comprehensible and due to this fact more useful to the on a regular basis trader.
Tim is the editor of the POWR Options newsletter. Learn more about Tim’s background, together with links to his most up-to-date articles.
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