Monday, August 26, 2019

MSFT calls and capital gains

This cat and mouse game is not about the Apple invention, the mouse, it is about Microsoft.  Tomorrow I am going to go after another MSFT call; here's why.

  • MSFT has growing revenues which are hard to find in the group of stocks in which I invest; stocks that pay a dividend.
  • Microsoft's P/E (price earnings ratio) of 30.5 reflects that growth.
  • MSFT's dividend yield is low not even beating the 2 year US Treasury.
  • Microsoft's ex-dividend date tends to fall one day before quarterly options expire

I like Microsoft but it is not one of the stocks I cannot afford to lose.  While I am basically an income investor, I do use growth in the portfolios I manage; Microsoft is evidence of that. But income is king and covered calls have provided a nice income.  

I will not add to MSFT tomorrow just to execute this trade.  I will use shares from my existing cost basis.  Below are the potential results of the a $150 strike, November 15, 2019 expiration.  

The above table illustrates your potential return if you bought at the close on Monday.  You can use my call calculator to change the basis and premium to determine your potential return when trading commences on Tuesday, August 27, 2019.

The next  table illustrates my potential return using the cost basis of the shares I will use to cover the call.   I may get to keep MSFT or  I could lose it.  If I lose it to the call buyer, I will have taken enormous profit.  And, should MSFT have a price correction that does not make it a poor fundamental play, I could add again and sell more calls on the new cost basis.

The Cat and Mouse game.  I have been using this MSFT covered call strategy for the past 8 quarters and when the stock is at or above the strike price, the call buyer exercises the option to buy early.  This allows the buyer, who paid me the premium, to cash the dividend.   Therefore, a better measure of this call option would be to not include the dividend and see how it works out.

In the case of MSFT, the dividend is comforting but not consequential.  Capital gains and call premium income are good for ordinary income investors and sometimes you can find growth as well.

M*  MoneyMadam
Disclosure:  Long MSFT,  intending to sell calls

8/27/2019 Update to Post

Here is the actual trade executed this morning:  Sold $150 strike 11/15/2019 expiration for a premium of $1.60