I am not a Microsoft (MSFT) fan. Microsoft has lost its mojo and loses market share every hour to Apple, free software, Android phones and so on. That being said, it still, metaphorically speaking, prints cash — and in the past few years has been giving investors a 2.5% per annum dividend.
You can do far better without owning the stock of a company that is growing slower than many other tech outfits. Sell puts instead. Why?
If you own the stock to get that yield, you generate a total of $800 per year if you own 1000 shares. That ties up $32,000 in capital for a year at today’s price for the stock. If you sell April $32 puts, 10 contracts, tying up $32,000 in capital for less than a month, you would generate $370 in cash. Do it twelve times a year and you generate $4,400 in cash, a 14% return.
Is it that simple? Yes. And no.
It is simple because MSFT does not move quickly – up or down – and this gives you time to see the premium, the price and cash paid to you for the put you sold to erode over time. Unlike many other stocks that do not move quickly, the premiums on MSFT options are quite rich, offering, right now, a more than 1% return per month.
It is not simple because you cannot sell the put and go away. Well, maybe you can. The way you do it is to sell the put for $.37 cents or $37 a contract. Rather than assume if will expire worthless, you put in a “good until cancelled” order to buy it back at some target prices – in this case, let’s say a nickel. That way you do not have to watch screens or wait for alerts. This approach reduces your annual return on selling monthly MSFT puts to around 12%
When the stock goes down
What if the stock goes down? Simple – you buy back the put and sell another one for a later expiration date, a process called “rolling.” Assuming you do this in a cash positive way — you should always roll a put position in a cash positive way — you end up generating more cash and income while you avoid the kind of capital loss you could incur if you owned the stock and it fell.
Why Microsoft makes sense
Why Microsoft and not some other name with even greater premiums on puts?
- Microsoft moves slowly, perfect for options sellers, lousy for options buyers.
- The premiums on MSFT puts are higher than other stocks with similar beta or volatility.
- You don’t have to worry about MSFT going bankrupt or the stock declining so far that your capital gets tied up for an extended period of time if you have to roll the position for an extended period of time. As I said above, I do not like the company, or the stock, but it prints cash and is still a favorite of institutional investors. There is little danger of the stock crashing.
- MSFT is currently in the early phases of a product cycle that will boost revenues and profits for several quarters.
Note: 14% is a big number. Think about it.