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If the perpetually record-high stock market excites you, and you believe that buy-the-dip is a legitimate investment strategy that will always drive prices, say hello to
MicroStrategy.
The stock has everything that extremely aggressive investors like. The price is so high that it seems to levitate above the market. Part of the magic is that the company is a quasi-proxy for Bitcoin, which excites people eager for cryptocurrency opportunities.
MicroStrategy’s
(ticker: MSTR) executives seem to understand the market zeitgeist. The company, which provides business software and cloud services, recently said that it will sell $400 million in bonds to institutional investors to buy more Bitcoin.
MicroStrategy already owns 92,079 Bitcoins, worth more than $4.6 billion with Bitcoin at $50,000.
MicroStrategy is not the type of stock that normally appears in this column, and it may annoy regular readers who prefer more strategic investments with less risk.
But MicroStrategy’s options have something worth considering for aggressive investors: big premiums. In fact, MicroStrategy’s September $660 put that expires on Sept. 3, was recently trading around $17.74. In other words, anyone willing to buy the stock at a lower price can get paid a hefty sum for selling cash-secured puts and agreeing to buy the stock at a lower price.
Is this trade risky? Absolutely. It might be one of the riskiest trades in this column in years. But the potential to pocket such a large premium over a short period will probably appeal to aggressive traders.
The risk is that something happens that pushes the stock price far below the put strike price. If that happens, investors can buy the stock at the put strike price, or try to adjust the put in the options market to avoid assignment. Regardless, the drama will be high if the trade sputters.
A way to minimize the downside risk of the cash-secured put trade is to seek puts that are dramatically less than the security price and 30% or 40% below the stock price.
The money received for selling the put can be sharply less in those situations, but many institutional investors use this so-called “teeny” strategy on index options, and other securities, to raise cash. The strategy works great as long as the security price does not experience an extraordinary decline. If the index collapses, “teeny” investors are in the tough spot of having to buy back positions at losses.
During the past 52 weeks, MicroStrategy’s stock has ranged from $136.89 to $1,315. The stock is up 85% in 2021 and 389% over the past year.
Despite those gains, many institutional investors are skeptical of MicroStrategy.
Investors have shorted about 25% of the stock, betting that it will sink. They have borrowed shares held by long investors, and sold them in anticipation that something will happen that will allow them to cover the stock at lower prices.
On the surface, stocks with high short interest can seem like they are poised to decline. But high short interest can be a double-edged sword.
Should anything happen that pushes the stock price higher—say, surging Bitcoin prices, good earnings, or favorable news—the shorts often rush to buy stock and limit their losses, which can push shares higher.
The put-sale idea expresses a view that MicroStrategy stock will advance or remain in a holding period over the next few weeks. If that happens, this trade will be like taking candy from a baby. On the other hand, if it doesn’t happen, well, at least you’ll have a Bitcoin proxy.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
