Dipping my toe in the water (Microsoft)

[DoraM]

I just completed my last purchase of Microsoft April 2012 $28 call options and now have 100 total contracts at an average price of $1.02.

Kind of fun controlling a quarter of a million dollars in shares with just $10K.

My husband thinks I am crazy, but then again, he spends more on his bass boat than I do with my personal investing account. Our 401K and IRAs are in bonds and index funds. Maybe I will buy some fresh fish at the market with my profits and taunt him.

 

[Coolius]

Good Luck to you, hope you make a pot of cash.

I am also an options kind of guy, but usually sell naked puts instead of buying calls. I know that my risk is bigger, in that I can lose way more than the premium.

But I rationalize this by anticipating that I would want to own the stock at the strike anyway; and should I be assigned, I can write covered calls until I get them called away.

For example, I have sold Chevron ( CVX ) December $65 puts; if I get CVX at $65, that is a PE ratio of less than 7, plus a div yield of 5%+. With those, I suspect I can hold onto the shares for the inevitable rise in price to a more reasonable PE ratio.

Coolius

 

[DoraM]

I thought about buying puts on CMG, but I actually like eating there so have not. Still, seeing it at $308 with a PE of 52...I would never buy the stock or buy calls. The options on that stock are very very expensive adjusted for the stock price and expiration compared to something like microsoft.

 

[studbucket]

So I had to read up on what call options were and how they worked, but if I understand them, I think you made a reasonable "bet". MSFT's stock has gotten above 28,29,30 dollars each of the past several years, Office 365 seems to have helped the stock, and Ballmer's been talking in the media about "record profits". Plus, the stock will likely get a bump as Windows 8 information is put out.

*Disclaimer: I work for M$FT. I have no substantial inside info on Windows 8, they keep it really secret, even though my work relies directly upon Windows 8 and I meet with folks over there weekly. When it comes to new features, the best I can tell you is what you can find online.

 

[DoraM]

So I had to read up on what call options were and how they worked, but if I understand them, I think you made a reasonable "bet". MSFT's stock has gotten above 28,29,30 dollars each of the past several years, Office 365 seems to have helped the stock, and Ballmer's been talking in the media about "record profits". Plus, the stock will likely get a bump as Windows 8 information is put out.

*Disclaimer: I work for M$FT. I have no substantial inside info on Windows 8, they keep it really secret, even though my work relies directly upon Windows 8 and I meet with folks over there weekly. When it comes to new features, the best I can tell you is what you can find online.

I guess since you only started working there 3 years ago as a full timer you did not get any option grants as a sign up bonus, otherwise you would definately know what call options are

They used to give a pretty sizeable block of options to new employees, known affectionately as golden handcuffs. As the gold started wearing off over the last decade, showing it was actually just a thin plating, they switched to stock grants.

I have a simple analysis of the stock that goes like this:

market will allow PE of 11. Current foward PE is 9.39. Multiplier then is 1.17. Current share price is $26. Share price next year will reach a high of at least $26 * 1.17 = $30.42. Note that I really should have purchased Jan 2013 options instead to make sure I captured this high, but the bid/ask spread on the April 2012 options was much better and I may want to cap off my trade by selling April 2012 $30 options if they reach near $1 before earnings.

 

[studbucket]

I got an MCS, so I actually only have 2 years FTE, 1 year intern

I've heard of the golden handcuffs and actually closely with a guy who just hit 24 years here, and all of his friends from when he started have retired, gotten bored, and went back to work somewhere.

Thanks for the info!

 

[DoraM]

I got an MCS, so I actually only have 2 years FTE, 1 year intern

Ah, I knew from your sig (retiring in 2031 at 45) that you were around age 25, so figured you were 22 when you started at msft, since they would not hire a dev or pm without a degree (nowadays). Anyway, 3 years was a educated guess.

 

[Surewhitey]

I thought about buying puts on CMG, but I actually like eating there so have not. Still, seeing it at $308 with a PE of 52...I would never buy the stock or buy calls. The options on that stock are very very expensive adjusted for the stock price and expiration compared to something like microsoft.

We bought in on a big dip some 4 months ago at $238...just sold it today at $314.

Made a quick 30%...

 

[Surewhitey]

I just completed my last purchase of Microsoft April 2012 $28 call options and now have 100 total contracts at an average price of $1.02.

Kind of fun controlling a quarter of a million dollars in shares with just $10K.

My husband thinks I am crazy, but then again, he spends more on his bass boat than I do with my personal investing account. Our 401K and IRAs are in bonds and index funds. Maybe I will buy some fresh fish at the market with my profits and taunt him.

We bought into 400 shrs of MSFT about 1 month ago; made a quick 7.5% in a month & cashed out today...

 

[DoraM]

Today my husband came over and looked at my account and saw I was up almost $2000 on the $10,000 microsoft investment. I told him to go wash his bass boat and leave my money alone.

Thinking of selling half of the calls soon and locking in some gains.

 

[DoraM]

Just cashed out at $1.32

$3000 gain on $10,000 investment in 2 weeks is enough for me.

I may give my hubby $50 for a new reel.

 

[Nords]

Just cashed out at $1.32
$3000 gain on $10,000 investment in 2 weeks is enough for me.

If those had expired worthless then a number of posters would have shaken their heads and said "Why would you do this? What lessons have you learned here?"

Now that you're calculating how much you'll need to add to your September federal/state estimated tax payments, I think the same questions could be asked.

Is it entertainment value? The commitment to and validation of the research effort? More money to donate to charity? Raising cash so that you don't have to sell blood plasma for prescription medications?

I bring this up because spouse and I have no need to invest the time & effort in selling covered calls, yet we do. It helps us rebalance when we should, but it's an awful complicated way to arrive at a selling decision. I also invest a considerable amount of time & effort investing in a couple of startup companies, but I have no real purpose for the hypothetical profits and no clear exit strategy.

I guess the point is that the risks greatly outweigh the rewards, even when there are actually rewards. So why do this?

More to the point, when you locate your next opportunity will you purchase $20K of calls?

I may give my hubby $50 for a new reel.

Tell him to do his own research!

 

[DoraM]

If those had expired worthless then a number of posters would have shaken their heads and said "Why would you do this? What lessons have you learned here?"

Now that you're calculating how much you'll need to add to your September federal/state estimated tax payments, I think the same questions could be asked.

Is it entertainment value? The commitment to and validation of the research effort? More money to donate to charity? Raising cash so that you don't have to sell blood plasma for prescription medications?

I bring this up because spouse and I have no need to invest the time & effort in selling covered calls, yet we do. It helps us rebalance when we should, but it's an awful complicated way to arrive at a selling decision. I also invest a considerable amount of time & effort investing in a couple of startup companies, but I have no real purpose for the hypothetical profits and no clear exit strategy.

I guess the point is that the risks greatly outweigh the rewards, even when there are actually rewards. So why do this?

More to the point, when you locate your next opportunity will you purchase $20K of calls?


Tell him to do his own research!

Yes, it is entertainment value. I also had a stop limit at $1.00 so it was very unlikely April 2012 options would go to zero (microsoft bankrupt?).

Taxes are a pain...but we usually get back about $2000 so no need to send in an estimated payment (yet).

Selling covered calls is taking 100% risk for 10% gain...not for me.

 

[clifp]

It is somewhat the entertainment value for me also and having fun at the investment game. Of course I also believe in reduces the overall volatility of my heavy equity portfolio.

One of the few bad things about retirement is it changed investment/speculating from an interesting hobby of mine into a hobby. The short-term trading (writing 90% of the options) keeps my interest in the market while preventing from day trading my assets into nothing.

 

[clifp]

Just cashed out at $1.32

$3000 gain on $10,000 investment in 2 weeks is enough for me.

I may give my hubby $50 for a new reel.

Nicely done. If I maybe so [-]obnoxious know it all[/-] bold. May I suggest some alternatives trading strategies.

My understanding is that you purchased those particular long options because you though Microsoft would reach $30 in the next year based some quite logical analysis and I am guessing a gut feel that MSFT was oversold.

The market had a very nice run up and MSFT went along for the ride. Yet sold out after only a few weeks and a 30% gain. In general the point of purchasing an out of the money option is to have a shot at double, or tripling your money while limited your downside risk. All to often traders sell their winners to early and hang on to their losses, although I guess you had a stop loss to limit that. (I am no fan of stop losses but another thread.) If you only were concerned about short term MSFT action, than you would have been better off purchasing only a few month options.

Or I think preferably if you think MSFT is a $30 stock than have the courage of your convictions or at the very least wait till it hits the strike price for selling.

Just my not so humble opinion.

 

[DoraM]

Nicely done. If I maybe so [-]obnoxious know it all[/-] bold. May I suggest some alternatives trading strategies.

My understanding is that you purchased those particular long options because you though Microsoft would reach $30 in the next year based some quite logical analysis and I am guessing a gut feel that MSFT was oversold.

The market had a very nice run up and MSFT went along for the ride. Yet sold out after only a few weeks and a 30% gain. In general the point of purchasing an out of the money option is to have a shot at double, or tripling your money while limited your downside risk. All to often traders sell their winners to early and hang on to their losses, although I guess you had a stop loss to limit that. (I am no fan of stop losses but another thread.) If you only were concerned about short term MSFT action, than you would have been better off purchasing only a few month options.

Or I think preferably if you think MSFT is a $30 stock than have the courage of your convictions or at the very least wait till it hits the strike price for selling.

Just my not so humble opinion.

No, you have very good points. Let me try to explain my reasoning.

I do think MSFT is a $30 stock, however Mr. Market does not (right now). I was not expecting the run to $27 to happen so fast which is why I wanted options far enough out (almost LEAPS) to give me time to absorb some short term negatives. Remember, I purchased these calls before the vote in Greece, so there could have been a short term drop in the whole market.

I think Bill or Steve will initiate an automated stock sale after earnings, and there may be opportunity to pick up the options again for near $1. At least that is what usually happens after earnings...good earnings, Bill puts 8 trillion stocks for sale, share price tanks.

And lastly....$3000 profit sounded better than $10,000 loss.

 

[DoraM]

Oh snap! Looks like selling out yesterday was the right move after all.

Might pick up the options again today for $1.20 or less.

 

[Coolius]

I think you did the correct thing to sell the options - a 30% gain in a few months is nothing to sneeze at.

In today's very volatile market, where every news item causes huge ups and downs and knee jerk reactions, I try and take profits often ( small though they may be ), and get out to fight another day.

But every one of us has their own strategy, that's what makes a market.

Wishing you continued success with your MSFT calls!