A “short strangle,” according to Merrill Lynch analyst Kash Rangan. He’s neutral on the stock, which he expects will hit $25 if Vista ships in time and $22 if it’s delayed past January.
In the meantime, Microsoft investors with a head for numbers and a stomach for options may make money with a short strangle, he said in a research note today. It works like this:
“This short strangle uses Oct. 21, 2006 options since we expect no major catalyst until January 2007. Investors would sell $25.00 call options, and sell $22.50 put options. The combined $1.20 premium provides a 5.2% return (16.5% annualized). This strategy is profitable in the $21.30 to $26.20 range, though we would caution that investors are exposed to losses outside this range.”
Or try one of these.