Selling Weekly Puts After Disappointing Earnings Reports: A Real-Life Example with Microsoft Corp. (Nasdaq: MSFT) – December 26, 2023
We can leverage our knowledge of cash-secured puts to take advantage of common scenarios. In this article, we will detail how to take advantage of a disappointing earnings report from a stellar blue-chip company. On 7/25/2023, MSFT reported earnings and issued guidance that fell short of market consensus. Share price declined by more than $15.00 per-share. Did MSFT suddenly become a company we would want no part of? Of course not. Will share price decline even further or will it recover? I would lean towards the latter but no guarantees.
Rationale for selling weekly cash-secured puts (CSPs) after a disappointing chip earnings report
- Using out-of-the-money CSPs will hedge against further share price decline
- By selling weekly puts, our annualized returns will be greater than using longer dated options
- Significant annualized returns are probable
- Favor companies that we would otherwise not minding including in our stock portfolios
MSFT: Year-to-date chart through 7/28/2023
Note that MSFT was outperforming the S&P 500 for over 6 months and continued to do so even after the 7/25/2023 earnings release.
Broker screenshot showing sale of the 7/28/2023 $325.00 put for $1.03 per share
MSFT: 3-day calculations
- The BCI Trade Management Calculator shows a 3-day return of 0.32% (brown cell)
- The spreadsheet shows an annualized return of 38.68% but that stat is exaggerated because it includes weekend days which we can’t take advantage of using weekly options
- The more accurate annualized return is 17%, still significant
- If the put option is allowed is exercise, MSFT would be purchased at a breakeven price point of $323.97 (yellow cell), a discount of 3.17% (purple cell) from trade entry
Discussion
Mastering all aspects of option-selling allows us to take advantage of a myriad of scenarios that come up all the time. One such event is a disappointing earnings report from an elite-performing blue-chip company.
Author: Alan Ellman