Call Options Or Put Options On Microsoft (MSFT)?

| September 17, 2013 | 0 Comments

MicrosoftMicrosoft (MSFT) is once again making headlines.  The world’s largest software company has already made waves recently by buying Nokia’s (NOK) phone business.  Now MSFT management is making moves to appease its shareholders.

MSFT shares are trading at $32.93.  The stock’s up 28% from the 52-week low of $25.68 and is 9% below the 52-week high of $36.18.

Is this an opportunity to buy call options on MSFT with the company’s new share buyback and dividend hike?  Or should you buy put options on MSFT because these actions signal low growth expectations ahead?

The bulls make a convincing argument…

MSFT followed up its big Nokia phone business acquisition (for $7.2 billion) with another headline-making move.  This time around, management is clearly working to appease shareholders (who may or may not have liked the NOK acquisition).

The company is initiating a $40 billion stock buyback as well as hiking its dividend by 22%.  The new dividend will be $0.28 per share for a current yield of 3.4%.  That’s one of the biggest yields on the market for a tech company.

Shareholders are finally reaping the benefits of MSFT’s massive cash holdings.  This should keep existing shareholders appeased and could bring in a host of other investors looking for safety and income.

But the bears have a compelling case as well… 

As a software company, many investors still expect MSFT to behave like a growth stock.  After all, the company did just drop $7.2 billion on Nokia’s phone business in order to compete in the mobile device space.

But spending the kind of money MSFT has planned for its buyback and dividend hike signals the company is not expecting robust growth ahead.  In other words, the money now won’t be available for potential acquisitions or new product development.

Share buybacks and dividend boosts are good for income investors, but could imply the share price doesn’t have much upside from its current level.

So is MSFT’s buyback and dividend boost a reason to bet on the stock going higher, or are investors going to be disappointed the company isn’t focused on growth?

If you think the bulls are right, take a look at buying the MSFT October $33 calls for around $0.85.

If you think the bears are right, take a look at buying the MSFT October $33 puts for around $0.90.

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.