There are plenty of flashy internet adds promising enormous returns on option trades. Click the link and be transported to stories of 200%, 500%, even 1000% returns. This is not one of those stories. The reality is that a professional (or in our case, semi-professional) traders often go for singles and doubles, not home runs. For those that don’t prefer baseball analogies – we win over time with many small consistent gains and the occasional big win, rather than gambling solely on big wins.
Disney (Symbol: DIS) has been in the news recently for their launch of Disney+, a streaming service that I’ll happily pay $70/year for life as the proud father of two young girls. That’s just an excuse though, as there is plenty of entertainment for me too. Enough with the unpaid advertisements and on to the trade –
You can see the big run up in Disney after 10 million subscribers were announced the day after Disney+ launched. We waited a bit for the stock to settle and decided to sell a put spread, with the assumption the stock would stay above 145 for the near term:
On 11/25/2019, we sold 6 Dec 145/143 put spreads for 0.28. This is 1.4% return on risk for a little less than two weeks. This was just outside the straddle price for 6 Dec. The plan was to size the trade such that a max loss wouldn’t hurt much, a sideways market and we’d hold the spread until expiration, and if the market cooperates, we’d take off the trade for a quick profit.
The latter occurred:
Disney popped the next day, hitting a high of 153.41, allowing us to take some easy profits after one day of ‘work’. Even though the stock came down by the end of the session, one could take it off still capturing 0.17 the profit or 0.85%.
Does it always go this well? No, of course not, but notice that we had lots of ways to win. If the stock stayed the same over the next couple of weeks, we win. If it goes up, we win. If it goes down, but less than or equal to the market’s expectation, we win. The only way to lose is if DIS tumbles more than the market expects at which point our position sizing keeps us from a catastrophic loss.
Had the stock dipped below 145 at expiration, I would have closed for a small win/small loss. I would also consider taking assignment of some of the position and turning it into a wheel trade.
Disclosure – long DIS, Disney+ subscriber, and my kids love All the Disney.