After a big rally in 2014, Microsoft shares are up just 3 percent in 2015, albeit with a great deal of volatility. And that has traders hopping into the options market to find a way to make the stock work for them.
According to Stacey Gilbert, head of derivative strategy at Susquehanna, most of the options activity is being initiated by owners of the stock who are "overwriting" the shares. That is, holders are selling call options against their holding of the stock.
Since a call option grants the right to buy a stock for a given price within a given time, an individual who owns a stock and sells an upside call is forgoing the right to enjoy gains. In exchange, an individual is able to squeeze more money out of the stock.
For instance, Gilbert notes that there has been heavy interest in the Microsoft July 50-strike calls, which on Friday morning are trading at about 60 cents. If Microsoft stays below $50 through mid-July, these puts will expire worthless, offering an extra 1.3 percent yield over the next 10 weeks. That's 6.5 percent on annualized basis (without accounting for interest, or transaction fees). Add in the tech giant's 2.6 percent dividend yield, and earning more than 9 percent on Microsoft shares becomes a very real possibility.
Of course, the strategy is not without risk, as a trader is still on the hook if the stock falls—thus exposing the owner of the overwrite structure to asymmetrical risk on the downside. However, the extra yield does provide a nice cushion if the stock does fall.
There is risk on the upside, too, because if the stock rises to above the call's strike price, the stock will be "called away," and the jig is up.
But if the stock stays in a close range, then the potential profits can be great indeed.
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