Microsoft Offers Traders a Potential 170% Gain
Trade summary: A bull call spread in Microsoft Corporation (Nasdaq: MSFT) using the December $220 call option which can be bought for about $5.40 and the December $225 call could be sold for about $3.55. This trade would cost $1.85 to open, or $185 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $185. The maximum gain is $315 per contract. That is a potential gain of about 170% based on the amount risked in the trade.
Now, let’s look at the details.
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“The global platform for data-driven commerce, has expanded its partnership with Microsoft to open-up access to Xbox subscriptions and consoles sales. With new Xbox Series X and Xbox Series S now available in time for the year end buying season, the Xbox Game Pass Ultimate subscription service and Xbox All Access program are expected to be in high demand.
Microsoft will leverage the Bango Platform to enable telco partners to bundle Xbox Game Pass Ultimate and Xbox All Access in their subscription packages. This is the latest expansion of the Bango partnership with Microsoft, through which Bango powers carrier billed payments for Xbox gamers and across the Microsoft Store.
Xbox Game Pass Ultimate gives gamers access to over 100 high-quality games on console, PC and compatible mobile devices for one low monthly price.
With Xbox All Access players can get everything they need to jump into the next generation of gaming – an Xbox Series X or Xbox Series S, plus 24 months of Xbox Game Pass Ultimate – from $24.99 a month for 24 months with no upfront cost.
Partners that want to benefit from the global demand for Xbox gaming can now leverage the unique offer and targeting insights provided by the Bango Platform to attract many more customers.
Gaming subscriptions and console acquisition programs are aligned to the way consumers are increasingly accessing entertainment. Consumers are standardizing on cloud gaming subscription services for gaming content as it dramatically increases choice, compared to pay per game business models.
“Bango is focused on growing success for partners through data driven commerce. Unique Bango data insights optimize the targeting of product bundles to boost consumer engagement. Bango is excited to expand its partnership with Microsoft, to take Xbox Game Pass and consoles to millions more gamers across the world,” commented Paul Larbey, CEO at Bango.
MSFT has been consolidating near recent highs and struggling to break out.
The longer-term chart shows the consolidation comes near all time highs.
There is significant risk in the trade, but a spread trade can limit the risks.
A Specific Trade for MSFT
For MSFT, the December options allow a trader to gain exposure to the stock. This trade will be open for about three weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A December $220 call option can be bought for about $5.40 and the December $225 call could be sold for about $3.55. This trade would cost $1.85 to open, or $185 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $185.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in MSFT, the maximum gain is $315 ($225- $220= $5; 5- $1.85 = $3.15). This represents $315 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $185 to open this trade.
That is a potential gain of about 170% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying MSFT could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.