Microsoft Corp (MSFT)

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Microsoft's (MSFT) Earnings Keep Powering Higher, Attracting Short Put Income Players
By: Barchart | January 29, 2023

Microsoft (MSFT) reported stellar earnings results on Jan. 24, 2023, for its fiscal Q2 ending Dec. 31. The quality of its earnings, cash flow, shareholder returns, and buybacks continues to impress investors. As a result, this is attracting investors in out-of-the-money short put investors in income plays.

The software company was also in the news recently for having made a multi-billion investment in OpenAi, the artificial intelligence (AI) maker of the hugely popular ChatGPT interactive AI bot. This shows that it is in a dead-heat race against Alphabet (GOOG) and other companies in the AI arms race that could disrupt the whole search engine business.

Back on earnings, the company's massive free cash flow (FCF) of $4.9 billion, was down 49% year over year. But after a one-time tax payment, cash flow was off just 7% and FCF was down just 16% YoY.

However, the company kept up its large shareholder returns. It spent $4.6 billion in buybacks and $5.1 billion in dividends, or $9.7 billion in total. That works out to an annualized rate of $38.8 billion, which represents 2.09% of its total market value of $1,850 billion. That is not a very high yield, but investors are finding ways to supplement that income.

Shorting OTM MSFT Puts

For example, as I wrote about recently, investors in MSFT stock are also looking to short out-of-the-money puts. This is a very popular income-producing strategy since, as opposed to covered call writing, the investor's underlying position in the stock is never at risk.

It involves selling to put options buyers the obligation to buy from them MSFT stock at a much lower price. That put option sale produces a very favorable long-term income play.

For example, in my Jan. 22, 2023, article I wrote that the $215.00 strike price puts were trading for $1.58 per put option. At the time, MSFT was at $240.22 on Jan. 20. But today, Jan. 27, 2023, after the earnings release, MSFT is up to $248.16 per share.

That means that the short put income play was successful since the stock rose. As of Friday, Jan. 27, the $215.00 puts are now down to 57 cents per share. That means the investor who sold those puts at $1.58 a week ago can now buy them back at $0.57, making almost a $1.00 profit per put option.\

This also means the investor might want to roll them over to the next option period, March 3. For example, the $230 put options trade for $2.16 per put option. That is a higher strike price, but given the earnings and outlook for the company, this strike price, which is 7.32% below today's price, they look worth shorting for income.


MSFT Puts - March 3, 2023 expiration - Barchart - As of Jan. 27, 2023

That implies that the investor will receive $216 per put option that is “sold to open.” The investor must secure $23,000 in cash and/or margin (i.e., $230 strike price x 100 shares) with the brokerage firm to do this. Therefore, the immediate yield is 0.93% ($216/$23,000). That works out to an annualized return of 11.3%.

That is a significantly higher yield than the 2% total shareholder yield that a long MSFT investor receives. However, there is no opportunity to make a capital gain, as long as investors can make. This is why many long investors in MSFT stock like to also short OTM puts to create additional income. It also provides a disciplined way to buy MSFT stock cheaply if it ever dips to the short put price.

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