This Strategy Led Us to a Handy 62% Gain

During the COVID rally, Microsoft (MSFT) had rallied a whopping 163% and added over $1.5 trillion in market cap.

But in 2022, MSFT was hit by the heavy selling that impacted Big Tech. By year’s end, MSFT was struggling to stay above its yearly low.

Earlier this year, MSFT seemed to enjoy a change in fortune after rallying strongly in January.

However, that surge in momentum caused MSFT to go into overbought territory. By early February, MSFT was in danger of a reversal.

But this was good news for members of my trading advisory, The Opportunistic Trader. We spotted and traded this reversal to generate a 62% gain in a week.

Now let me show you how…

Looking for the Right Setup

On the chart below, you can see MSFT’s strong rally from the start of 2023. From early January to its February peak, it rallied an impressive 26%.

But as MSFT made fresh highs into February (upper orange line), the Relative Strength Index (RSI) showed that momentum had already peaked (lower orange line).

When price and momentum diverge, a change of direction is not far away…

Microsoft (MSFT)

Source: eSignal

However, MSFT’s chart wasn’t the only action that caught my eye. There was another fundamental story driving the broader market last month…

MSFT and other Big Tech stocks had been bid up by yet another “Fed pivot” story.

Once again, people believed that the Fed would start going easy on rate hikes… and that this would likely propel MSFT and other tech stocks higher.

However, on February 14, the consumer price index (CPI) report revealed inflation had slowed down only slightly by 0.1%. Overall, it was still 0.2% above market forecasts.

That pulled the rug out from MSFT’s (and the broader tech) rally.

While most investors were disappointed, this inflation data – along with our overbought signals – provided the perfect setup for us to place a short trade.

On February 14, we opened a short position on MSFT by buying put options. Note that put options increase in value when a share price falls.

And we couldn’t have nailed our timing better…

As soon as we entered the trade, it started going our way. Take another look at the chart…

Microsoft (MSFT)

Source: eSignal

The following Monday was a public holiday. So, when MSFT gapped lower on Tuesday, February 21, we closed out our trade by selling our MSFT put option for a 62% gain.

There were a few reasons why we closed out our trade…

When markets gap down like this, bargain hunters will typically come into the market and push the stock higher. By closing out the trade, we avoided the risk of that scenario playing out.

The other reason goes back to the chart…

As you can see, our exit point coincided with the RSI tracking on support (green line). If the RSI rebounded off this level, that would have sent MSFT higher… and this would have taken away some of our profits.

It’s important to note that we generated this high return in a week using options. If we shorted shares instead, our overall return would have been a smaller profit. The real benefit of options lies in their power to amplify returns in a short span.

And this MSFT trade shows that when you combine a strong setup with the right strategy, you can quickly generate solid gains.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. In just a couple of days, I’ll hold my Shockwave Summit… and explain why March 17 needs to be circled in your calendar.

We’re seeing volatility continue in the markets… and it’s likely going to continue for some time. That’s bad news for many investors.

But if we know how to play these shockwaves as traders, we can actually turn this volatility to our benefit. And that’s why I’m so excited about March 17.

To learn more… including my favorite ticker in these moments… please sign up to attend this event. It’s happening on March 8, so you have time to prepare. You can RSVP with one-click right here.

Reader Mailbag

In today’s mailbag, members of The S&P Trader thank Larry for their positive experiences with his spread trade service…

From January 1 to March 1, I have increased my trading account from a modest $22,213 to $47,303 (213% return), in large part due to Larry Benedict’s The S&P Trader – and by modelling Larry’s short-term trades. I just wanted to say thank you.

– Michael T.

Hi Larry, I recently retired from the USPS after 33 years. I have always enjoyed trading options. I have been profitable doing it. I wasn’t really making enough cash to what I would consider, a supplement to my retirement income. Well, I can’t claim that any longer.

Your S&P Trader service is by far the most lucrative and exciting service I have had the privilege to join. I have made enough in the past four weeks to pay for your elite service and have some serious money to definitely supplement my income.

Thank you so much for what you do. It means everything to me and my family.

– Dave W.

Thank you for your thoughtful comments. We look forward to reading them every day at [email protected].