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Say I wanted to bet on MSFT beating the S&P 500 (i.e. I want to make money if they both go down, but MSFT goes down less).

Of course, I could short SPY and go long MSFT. Are there better strategies?

  • Options may work to give more leverage though this would imply computing future stock prices somewhat or getting into derivatives possibly. – JB King Oct 13 '14 at 20:05
  • Right, I could buy MSFT calls and SPY puts, but I think I'm looking for something a little more reliable in terms of the return - i.e. if MSFT is down 1% and then S&P 500 is down 2%, I'd want to guarantee a return of ~1%. – Jer Oct 13 '14 at 22:05
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    long/short is the way to do what you're asking for. You can do that directly or by using options. – Guy Sirton Oct 14 '14 at 3:10
  • As Mr. Buffet says, have a long term horizon and choose a company that is not going to go out of business! – user19894 Oct 14 '14 at 14:54
  • What is wrong with going long msft and short spy? That will do exactly what you want. – assylias Dec 13 '14 at 23:04
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tl;dr: Unfortunately, there is little available to the retail investor that fits your description.

Institutional investors can use swaps to gain leverage on the above trade. A bank will build a basket of long MSFT and short SPY and then quote a rate against LIBOR (London Interbank Offered Rate) and a margin requirement. So at the end of the swap the bank will pay the difference in total return between MSFT and SPY and the investor will pay some amount of cash back. The nice thing for the investor is that the margin requirement will often be fairly small if their credit is good so the investor can lever the trade up significantly.

A retail investor could call up your broker and try to get the above but on the off chance they let you the margin requirement might be higher than just going short the SPY.

If you aren't a retail investor, you might be able to do something like be long a 3X tech ETF and short 3X SPY ETF. If you are very clever you might be able to combine multiple levered tech ETFs to get something like 3X MSFT. However, I would strongly caution against levered etfs for most retail investors as the fees are high and levered etfs tend to strongly drift away from the index against the investor over anything but the shortest time periods.

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You could buy options. I do not know what your time horizon is but it makes all the difference due to theta burn. There are weekly, monthly, quarterly, yearly and even longer duration options called leaps. You have decided how long of a time frame. You also have to see what the implied volatility is for the underlying because if you think hypothetically that the price of the spy is 100 dollars currently. Today is hypothetically a Thursday and you buy a weekly option expiring on Friday ( the next day) of strike 100.5 and the call option is priced at .55 cents and you buy it. This means that the underlying has to move .5 dollars in one day to be considered in the money but at time 0, the option should only be worth its intrinsic value which is the underlying, (Say the SPY moved 55 cents up from 100 to 100.55), (100.55) minus the strike (100.5) = 5 cents, so if you payed 55 cents and one day later at expiration its worth 5 cents ,you lost almost 91% of your money, rather with buying and holding you lose a lot less. The leverage is on a 10x scale typically. That is why timing is so important. Anyone can say x stock is going to go up in the future, but if you know ****when**** you can make a killing if it is not already priced into the market.

Another thing you can do is figure out how much MSFT contributes to the SPX movement in terms of points. What does a 1% move in MSFT doto SPX. If you can calculate that and you think you know where MSFT is going, you can just trade the spy options synthetically as if it were microsoft.

You could also buy msft stock on margin as a retail investor, but be careful.

Like Rhaskett said, look into an etf that has microsoft. The nasdaq has a nasdaq-100 which microsoft is in called the triple Q. The ticker is qqq. PowerShares QQQ™, formerly known as "QQQ" or the "NASDAQ- 100 Index Tracking Stock®", is an exchange-traded fund based on the Nasdaq-100 Index®.

Best of luck and always understand what you are buying before you buy it,

JL

  • Actually, selling options might be better, if your broker qualifies to do so. Selling an MSFT at-money put and an at-money SPY call will make money even if MSFT and SPY remain same (however, you might also lose money if the difference increases too quickly). You might also ask this question on quant.stackexchange.com – barrycarter Oct 14 '14 at 18:15
  • Hey dude, unless you have 110k, you cannot sell options. interactivebrokers.com/en/index.php?f=margin&p=opthttps://… – Ted Taylor of Life Oct 15 '14 at 22:23
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    Yes, you do need a fair amount of capital to sell options (different brokers have different rules) since your potential loss can be very high (selling puts) or unlimited (selling calls). Thus the "if your broker qualifies to do so". – barrycarter Oct 15 '14 at 22:30

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