Microsoft (MSFT) has tumbled in recent days, dropping below the 50-day moving average, as well as the 21-day exponential moving average. So it may be worth switching to a short-term bearish view on MSFT stock.
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Traders who think MSFT will not reclaim the 50-day line in the next few weeks could look at a bear call spread as an option trade.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can turn a profit if MSFT stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
MSFT Stock Today: Setting Up A Bear Call Spread
A MSFT bear call spread using the Oct. 20 expiry and the 335-to-340 strike prices can be sold for around $0.90.
Traders selling the spread would receive $90 in option premium. That marks the maximum possible gain. The maximum loss would be $410.
The spread will achieve the maximum profit if MSFT stock closes below 335 on Oct. 20, in which case the entire spread would expire worthless, allowing the trader to keep the $90 option premium.
How about the maximum loss? It would occur if MSFT closes above 340 on Oct. 20, which would see the premium seller lose $410 on the trade per set of contracts.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. You always know the worst-case scenario in advance.
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Managing Risk
One could set a stop loss if the spread value rises from $0.90 to $1.80, or if MSFT crosses back above 330.
As this is a bearish position, traders who think MSFT stock could move higher from here should not enter this trade.
According to IBD Stock Checkup, MSFT stock is ranked No. 2 in its group. It has a Composite Rating of 92, an EPS Rating of 96 and a Relative Strength Rating of 84.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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