In 2014 Microsoft made the CEO change from Ballmer to Nadella and the stock has never looked back. It passed its dotcom bubble highs in 2016 (around $60) and has enjoyed a breakout since that now has the stock poised to print $100. In April, a couple of weeks ahead of their fiscal third-quarter results, and when the stock was trading in the low 90’s we detailed a hedge for those long the stock, that would allow for room for the stock to get to 100, while closely placing protection just below in case the report caused profit taking that took the stock lower. Here’s what we said at the time and the initial hedge versus long stock. From April 12th:
While the move from 2014 looks parabolic, shares of MSFT have demonstrated some nice relative out-performance over the last month, down only 4% from its all-time highs made in March, and basing for most of 2018. With the company set to report fiscal Q3 earnings on April 26th I think its safe to say that new highs could easily be in order, maybe finally touch the nice round number of $100 on a beat and raise.
But a miss and a guide lower and you have the stock re-testing last month’s lows near $87. Holders of the stock might consider collaring stock into the print…
VS 100 shares of MSFT ($93) Buy May 87.50 / 100 collar for 50 cents
-Sell to open 1 May 100 call at 90 cents
-Buy to open 1 May 87.50 put for $1.40
The stock is now $98, approaching that $100 level and with this collar expiring at the end of the week let’s check back in and see if anything needs to be done.
The initial hedge cost .50 and allowed enough room for the stock to get to 100. At $98 the collar can be allowed to expire this Friday or closed right now for about .10. Closing the collar means the total cost of the hedge is .60 (plus commissions). That’s not bad versus the 5.00 profit in the stock (and the peace of mind a hedge can provide into earnings in a volatile market).
That’s a good lesson for a long term holding in a mature stock like MSFT. You don’t want to be forced to take profits on the way up, but at the same time you don’t want to waste a lot of money on hedges. The collar was cheap, made sense after the stock’s run over the last few years and allowed for realistic room for the stock to continue higher towards 100.
After this collar is closed (or allowed to expire on Friday) It probably makes sense for long holders to see what happens when the stock gets to the 100 level as it may be a good timing to add some yield with a call sale a bit above 100. The round number could mean some profit taking orders are lurking there or slightly above, an overwrite at 105 or so won’t act as a hedge if the stock were to fail at that level and go substantially lower, but it could act as a nice little opportunity if the stock consolidates or only pulls back slightly.