Sold MSFT May Naked Put

Five minutes before the market closed yesterday, my limit order for a new naked put hit and I didn’t have time to write-up my trade details before leaving for my son’s track meet. (2 PRs for him!) I entered my limit order mid-afternoon and then saw MSFT running away from me, but I didn’t chase the trade. That’s one of the advantages of not being overly bullish. I can wait for the trade to come to me and if I miss out on it, I’m fine.

While MSFT was trading at $116.53, I sold one MSFT May $115 naked put for $3.35 and received $334.32 after paying $0.68 in commission. If MSFT stays above my strike, I’ll make 2.99%, 21.04% annualized. I have a 4.26% cushion from a loss and could even see MSFT drop 1.4% before my profits are cut at all.

Just a few days ago, MSFT hit an all-time high of $120.65, which it reached at the very end of the day. The bullish attitude didn’t hold and MSFT slipped for the next few days. I didn’t catch the low of the day yesterday at $115.53 and could’ve made more, but I think my risk level on this trade is relatively low. Of course, a turn in the overall market would sink all ships temporarily, but MSFT should hold on better than most.

It did fall below its 10-day moving average yesterday and even closed below it. That’s a warning sign and worth noting. The 20-day moving average has offered solid support on dips for the past month and a half. I expect it to hold on this draw down too. If this new option is assigned, my cost per share will be $111.66. That’s below the trend line of higher lows that began in early January. It’s also below the horizontal line that was resistance around $13.25 before MSFT broke above it on March 12. This line is the important one for technicians to watch, especially since it is on a path to converge soon with the trend line of higher lows that I just mentioned.

If these two technical hurdles don’t provide support, MSFT could fall to its 200-day moving average ($107.52 and climbing). This line is close to the 50% Fibonacci retracement area. I’d have a paper loss around $4 if that’s where MSFT bottomed, but since I don’t expect further weakness below it, MSFT could rebound before my option is assigned. Better yet, it could be assigned and then I could write a $115 covered call for additional income.

This trade pulls me within spitting distance from being 100% invested, where I haven’t been in a while. However, my AAPL April covered call is more than $13 in the money. I expect these shares to be called away and give me $17,500 (from my $175 strike) to work with. I’m not in a rush to buy the AAPL call back since there’s still $0.90 of time value left in it, but I am looking for a better investment return elsewhere. I just don’t have to rush into something new as long as I have some potential gain from my current holdings.