Bullish and Bearish Plays in Microsoft (NASDAQ:MSFT)

Microsoft Options Strategies Is a company's fundamental strength enough to power a stock higher? It's an age-old rhetorical question and one that blue-chip names like Wal-Mart WMT and Microsoft MSFT have confronted for years. MSFT said earlier this week that it was upping its quarterly dividend to 16 cents per share from 13 cents, marking its first dividend increase in two years.

Is this boost a sign that MSFT executives have renewed confidence in the company and perhaps in the economy as a whole? The company is now set to pay out $5.6 billion to shareholders each year, making the software giant “one of the [world's] largest aggregate returns of cash to shareholders,” according to Jefferies & Co.

Despite the move, the shares dipped lower in the wake of the announcement, as the increase wasn't quite as high as some analysts were hoping for. In an example of “buy the rumor, sell the news,” MSFT dipped more than 2% on the day its dividend hike hit the news.

MSFT has been flat-to-lower following a sharp rally in 2009 that took MSFT shares from a March low around $14.90 to a late-December high near $31. The stock hit a double-top in late April, shortly before the broad market began tumbling lower, and the stock has yet to revisit the 30 level ever since.

Investors who want to add Microsoft to their portfolio without buying or selling the shares outright could consider any number of a wide variety of option strategies. For educational purposes, we've described one strategy for the bulls (a cash-secured put) and one for the bears (a bear call spread) below. All prices are as of Thursday midday. MSFT shares were trading down roughly 0.25%, at $24.55.

Bullish Option Strategy: Cash-Secured Put

Bullish investors who wouldn't mind eventually owning MSFT shares at a “discount” to the current price, could sell November-dated, out-of-the-money puts to collect a small premium. The November 24 put, for example, could be sold for a credit of 86 cents per put.

If held until expiration, if MSFT is still trading above $24, the investor keeps this credit as the maximum potential profit. If MSFT has fallen below $24, the investor will likely be assigned, and obligated to buy 100 shares of MSFT for every put sold.

The purchase price per 100 shares would effectively be $23.14 or the strike price less the premium collected for selling the put (times 100). At this price point, the stock's annual dividend yield would be equivalent to 2.8% up from the current yield of 2.6%, making a long stock position even more compelling. Note that it's in the best interest of the investor to set aside this necessary cash, so that the funds are available if necessary. Hence the term “cash-secured put.”

Breakeven on this short put is $23.14 but losses are essentially unlimited, similar to a long stock play. Investors shorting this put should be moderately bullish on MSFT, expecting it to either hold above $24 through the next two months or willing to own the shares at an entry point of $23.14. Below is a profit/loss diagram of this trade, built in an OptionsHouse virtual trading account.

Bearish Option Strategy: Short Call Spread

Microsoft watchers with a bearish outlook could consider a short call spread by selling the November 25 call and simultaneously buying the November 27 call. The net credit collected is 57 cents per spread. If MSFT stays range bound and fails to overcome the 25 strike by expiration on November 19, the trader keeps this credit as profit.

On the flip side, if the shares stage a rally and are trading above 27 when the options expire, losses are capped at $1.43, which is the difference in strike prices less the initial premium collected. Breakeven on the spread is $25.57, so as long as MSFT fails to rally 4.2% from current levels, the trade will be profitable at expiration.

Profit and Loss of Microsoft (MSFT) bear call spread