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Microsoft (MSFT) has been in a nice uptrend for the last few months, and is testing resistance at the 52-week high. So, what’s next for the stock?
The options market could be indicating that the stock might pull back to around 410 over the next week or so.
This is due to a theory called Max Pain and is something I talked about in this video for Barchart.
The Max Pain Theory claims that as option expiration approaches, stock prices will get pushed toward the price at which the greatest number of options in terms of dollar value will expire worthless.
Large institutions are generally net sellers of options, so they will benefit the most from options expiring worthless, or with the lowest net value.
We can use Barchart Excel to find the Max Pain level quickly and easily for any stock and expiration.
Within our Max Pain Excel file, we simply need to input the stock ticker and the expiration date and Barchart Excel will do the rest.
The Excel file then calculates the notional value of all open puts and calls. What we are looking for is the stock price at which the puts and calls have the lowest notional value.
Barchart Excel displays this data in table format and also a graph.
Here we can see that the Max Pain level for MSFT on March 28th is right around 410.
What can we do with this information?
Well, if we think that the Max Pain theory might play out this month, we could look to trade a butterfly spread centred at the 410 strike.
Let’s take a look at how that trade idea might be structured.
MSFT MAX PAIN BUTTERFLY SPREAD
A butterfly spread is constructed by buying a lower strike put, selling two middle strike puts and buying one upper strike put. The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.
The maximum profit is calculated as the difference between the short and long puts less the premium that you paid for the spread.
Using the March 28 expiry, the trade would involve buying the $400 strike put, selling two of the $410 strike puts and buying one $420 strike put.
The cost for the trade would be around $190 which is the most the trade could lose. The maximum potential gain is around $810.
The lower breakeven price is $401.90 and the upper breakeven price is $418.10.
MSFT COMPANY DETAILS
The Barchart Technical Opinion rating is a 100% Buy with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
MSFT rates as a Strong Buy according to 32 analysts with 3 Moderate Buy and 1 Hold rating. Implied volatility is 19.96% which gives MSFT an IV Percentile of 18% and an IV Rank of 33.69%
Microsoft Corporation is one of the largest broad-based technology providers in the world.
The company dominates the PC software market with more than 80% of the market share for operating systems.
The company's Microsoft 365 application suite is one of the most popular productivity software globally.
It is also now one of the two public cloud providers that can deliver a wide variety of infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) solutions at scale.
Microsoft's products include operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools and video games.
The company designs and sells PCs, tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories.
Through Azure, it offers cloud-based solutions that provide customers with software, services, platforms and content.
Conclusion And Risk Management
If MSFT broke back above 430, I would consider closing the trade early for a loss.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
