Investment strategy for CY2013 – medium to low risk


This post is not about convincing folks to dive into Microsoft investment. I am using it as an example simply because I personally believe it will work for this particular company since I’ve been following it very, very closely for many years. I could (and may do so) write another post on reasons WHY but this isn’t it. I do welcome any comments that provide an intelligent insight into why MSFT or why not, though. My own portfolio has a number of long MSFT positions at this moment – both stock and options.

Investment strategy for CY2013 – medium to low risk:

Buy MSFT shares (last price – $29.49)

Sell covered Jan’14 $35 calls (last price $1.06/contract)

For hypothetical $100K scenario: Buy 3,390 shares of MSFT stock (spent $100K) Sell 34 contracts  (get $3,600 cash)

If in January of 2014 stock closes below $36 ($35 strike price + $1.06 buyer paid you – as a breakeven for them), you keep the stock and $3600 (3.6% interest on 100K) and you get 3.1% dividend back from MSFT (click the link and look for “Forward Annual Dividend Yield in lower right corner) (another $3100) – 6.7% return on investment.

If in January of 2014 stock closes above $36, you sell the stock for $35 (profit of $5.5/share => $18,645 total) and get the same 3.1% dividend from MS (another $3100) – 21% return on investment

The only risk here is if MSFT stock will close below $29.49 by January 2014. In this case you simply pocket $3100 dividend (3.1%) which by then may be even higher from percentage standpoint since absolute value in cents/share won’t change.

If MSFT goes above $35, you’ll be missing the upside (let’s say it goes all the way to $40 – you just “missed” another $5 of potential upside)

If you feel MSFT will appreciate more than 18% from where it’s at today, sell covered Jan’14 $37 calls for $0.72/contract – less cash on hand but gives you another $2 on the upside if stock catapults to $40, for example.

Missed anything? Replace MSFT with any other company that you feel is just as safe for next year and pays the same dividends. Leave a comment – always interested in new leads!

More on “selling covered calls” – from Fidelity. I have an account with them, hence the link. I don’t get paid for referrals, so click away! 🙂

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