The tech contrarian in me wants to believe that the post-PC era is going to be less apocalyptic for stalwarts like Intel and Microsoft. Sure, Dell and HP are toast – but they’ve been dead in the water for some time.
Intel, on the other hand, has a server-side business that is doing great. Even if you’re doing computing in “the could”, you still have servers somewhere.
And when you survey the tech landscape and ask who can compete with Apple’s sweep of the Mac/iPad/iPhone stack, the list begins and ends with Google and Microsoft. Almost two years I advocated tech investors buy Apple and sell Microsoft, citing product development trends as the sole reason for my thesis.
Since then Apple has had quite the run, while Microsoft has continued its decade long stagnation. MSFT went from cheap to cheaper by all traditional valuation metrics…and it operates perhaps the most capital efficient business on the planet. If Windows 8 is alright, and manages to unify Windows devices across their PC/Windows tablet/Windows phone stack, couldn’t MSFT have a bit of punch in it?
When I looked at the option premiums on MSFT and found them to be quite generous, I punted on 100 shares of MSFT while simultaneously selling covered calls against my shares.
UNFORTUNATELY for me, I jumped into this trade to Microsoft’s disappointing earnings report, which has triggered an unrelenting selloff in MSFT since last week. Which makes this unfolding trade a fine experimental ground to learn, to what degree, a covered call strategy can offset losses in the underlying stock.
Initial Trade
We bought MSFT on 10/5 for 29.76, and simultaneously sold a Nov ’12 30.00 covered call contract for 0.72.
Then MSFT Gets Clobbered
When MSFT went into freefall, we bought back the call last Friday 10/19 for just 0.15, which would allow us to sell another one. This took our initial cost basis down from 29.76 to 29.19.
We sold a Dec ’12 29.00 call for 0.50 this morning – if this call expires worthless, our cost basis for the position will be down to 28.69.
Looking Ahead
Now this is not a great result overall, as MSFT is all the way down to 27.85 as I type this note. However a loss of 0.84 per share is certainly better than the loss of 1.91 per share we’d be staring down had we bought MSFT outright!
We’ll continue to watch MSFT, and if the freefall continues, we’ll look to buy back this new call position at a profit and sell another one. Ideally we are looking for a 75% profit before selling another one – anything less and we’d get eaten up by commissions.
This was not as clean as our Guidewire covered call trade, but it’s certainly an interesting one.
The post-PC world has been BRUTAL to Microsoft, with the latest pain triggered by it’s earnings miss.
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