Did you spot this potential trade? If I hadn’t dialed in my options tools, I may have missed it as well. You may recognize the company we are looking at today— Microsoft Corp. (stock symbol: MSFT.) but what you really need to see is the chart.
When I was a pilot, I couldn’t fly by just looking out the window. I had to use my gauges and instruments. Stock charts are similar to those gauges and make it possible to be more accurate in spotting great set ups.
On this chart we are going to look at the 10-Month Simple Moving Average. If you want more info on this indicator, click here.
As the chart shows, in March, the MSFT 1-Month Price, crossed above the 10-Month simple moving average (SMA) shown as the blue line above.
As long as the 1-Month price remains above the 10-Month SMA, the stock is more likely to keep trading at new highs and should be purchased. Our initial price target for MSFT is 375.00 per share.
The good news is MSFT is still above the 10-Month SMA so it has solid momentum to the upside and conditions are ripe for a bullish trade. But with just a couple more simple steps we can increase the potential for this trade and help it work if the market is up, down, or flat!!
How to Juice Up the Horsepower in This Trade Example
Now, since MSFT’s Monthly Price is currently trading above the 10-Month SMA and the stock will likely rally from here, let’s use the Hughes Optioneering calculator to look at the potential returns for a MSFT call option spread.
Feel free to reach out to us if you want to know more about how the Call Option Spread Calculator below works. It’s a tool you can get access to as a member (including option strike prices) but in this case we want to show you the potential results it helps us dial in.
The prices and returns represented below were calculated based on the current stock and option pricing for MSFT on 11/7/2023 before commissions.
Profit Potential in Any Direction
Look at the bottom line on the calculator.
The analysis reveals that if MSFT is flat or up at all at expiration the spread will realize a 51.1% return (circled).
And if MSFT decreases 7.5% at option expiration, the option spread would make a 28.3% return (circled).
How great is this news? This trade has the ability to win regardless of whether the stock is up, down, or flat!
For this option spread, the calculator analysis above reveals the cost of the spread is $662 (circled). The maximum risk for an option spread is the cost of the spread.
Due to option pricing characteristics, this option spread has a ‘built in’ 51.1% profit potential when the trade was initiated*.
Option spread trades can result in a higher percentage of winning trades compared to a directional option trade if you can profit when the underlying stock/ETF is up, down or flat.
A higher percentage of winning trades can give you the discipline needed to become a successful trader.
The Hughes Optioneering Team is here to help you identify winning trades just like this one.
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Wishing You the Best in Investing Success,
Editor, Trade of the Day
Have any questions? Email us at email@example.com
*Trading incurs risk and some people lose money trading.