Microsoft continues to power higher and is showing impressive relative strength and strong IBD ratings. So let's compare a weekly bull put spread on Microsoft stock with a monthly version of the same trade.
We generally look at bullish trades using monthly expiration dates. But some traders prefer using short-term options with the potential to generate much higher gains on an annualized basis.
Of course, high returns can't be achieved without high risk. Weekly options generally are considered to be more risky than monthly options.
Anyone who's taken Finance 101 knows that high returns come with high risk. So it pays to do your due diligence before using weekly options.
Possible Returns Of 165%, 507%
Assuming someone was looking to trade a bull put spread on Microsoft, they could generate roughly $70 in premium by selling the June 20 spread at 430 to 425. The capital at risk on that trade would be $430 so the trade has the potential to generate a 16.28% return in 36 days. That equates to more than 165% annually.
If the trader instead decided on a much shorter-term spread, they could generate around $75 in premium for selling the May 23 spread that runs 437.50 to 430.
One big difference is that to generate a similar amount of premium, the trader has to place the spread closer to the stock price and go slightly wider. This spread can make around $75 on risk of $675 for a potential 11.11% return.
That's a slightly lower return than the first example, but only takes eight days to achieve that return if the trade works out. On an annual basis, that equates to a return of just under 507%. That's a huge number, but don't expect every trade like this to be a winner.
Where The Risk Lies In Microsoft Stock
Short-term option trades like this are not for everyone, because when they go against you, there is very little you can do to salvage the transaction. But it could be a great way to ride bullish momentum in a stock like Microsoft.
According to Investor's Business Daily's IBD Stock Checkup, Microsoft stock ranks No. 2 in its group and has a Composite Rating of 94, an Earnings Per Share Rating of 92 and a Relative Strength Rating of 81.
Keep in mind 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.
Gavin McMaster has a master's degree in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
