6/7/2020 Plan: This week we look at a couple different ways to play Disney (Ticker: DIS)
6/5/2020 Plan (continued):
- DIS sell 26 Jun 115/113 put spread x2 for 0.30
- or DIS buy 17 July 120/115 1×2 puts for 0.80 credit if you want to get long DIS at lower prices
- Prices are as of market close 6/5/2020, actual fill and strikes may differ depending on Monday open, post will be updated accordingly.
- All trades are for educational purposes and do not constitute advice
- As always, reach out with any questions!
6/5/2020 Commentary:
Both trades this week are bullish in Disney, which has recovered a lot since its dip below 80 in March. The first trade is a standard put spread placed about 8% below current levels. The trade will make a little under 18% in 3 weeks if the options expire worthless (Math – 30 credit divided by 170 risk = 17.6%). The market is expecting about an $8 move by expiration and this put spread is outside of that.
The second trade is a bit more complicated. This is a put 1×2, which means we are buying 1 120 put and selling 2 115 puts and doing it for a 0.80 credit. Another way to look at it, is we are long a 120/115 put spread and then short a naked put. The result is that if Disney drops a lot, we’ll be long 100 Disney shares at an effective 109.20. We also have an opportunity to make more money if Disney expires between 120 and 110. Here is a P&L to help visualize:
- You can see that above 120, we keep our 0.80 credit.
- Anywhere between 110 and 120 we make more money from the long put spread.
- We break even at 109.20 and then lose below that
This is a more complicated trade and should only be put on if you want to be long DIS at 109.20 and have the cash in your account. If you like the concept, but don’t have the capital, you can also convert it into a butterfly to define your risk. As always, reach out with any questions!
6/8/2020 Entry:
Purchased 1 17 July 120 put and sold 2 17 July 115 puts for a total credit of 0.81, 0.01 more than planned. I did not fill the 115/113 put spread, but it was available for 0.27 to 0.28 when I looked near mid day. DIS finished up on the day, putting both positions in an early profit.
6/14/2020 Update:
The market took a pretty big tumble on Thursday, with a minor recovery on Friday. Disney ended the week at 115.49. We have a lot of time left on this trade, so there isn’t a need to do too much right now. As our intent is to go long at 109.19, we can monitor the price of the 120/115 put spread and consider taking it off to lock in some value. Then, if DIS recovers by expiration, we earn a bit more than if the whole thing expires. The trade-off is that if DIS continues to go down and ends below 115, our entry ends up being a bit higher. Let’s use current prices to break that down:
The 120/115 put spread is currently trading for 2.55. We could take that off now and be left with just a naked short put at 115. If DIS ends below 115 at expiration, we’ll be assigned the shares at an effective price of 111.64 (115 – 2.55 – 0.81 (original credit)).
If DIS ends up above 115, we will pocket the 2.55 plus the 0.81 originally taken in for a total of 3.36.
We can, of course, do nothing, but I wanted to point out this is a way to potentially win more if we expect the market to recover and DIS will end above 115.
6/21/2020 Update:
Disney ended the week at 114.35 with the put spread worth about $3. Similar to last week, one could take it off and remain short one put or simply leave the position alone.
6/27/2020 Update:
The put spread is currently worth $3.78, plus we are short another put at 115. With DIS at 108.820 one is down about $338 if they were to close it out. Our break even is at 109.19 at expiration (in a few weeks) and DIS is currently trading a bit below that level. As the original intent was to take shares, no change in position at this time.
7/6/2020 Update:
With just two weeks left in the position and DIS staying near our short strike, the position has shifted from being down to effectively flat (+$2). When one puts on a ratio spread of this type, a willingness to take ownership of the shares is required. If based on market conditions, other positions, etc., that willingness has faltered, there is now an opportunity to simply close the position for basically ‘free’. Other management approaches include selling the put spread for $3.87 and keeping the short put. The max value of that spread is $5, so you’d be capturing about 77% of the max value. If DIS stays flat for the week, we will see the value of the spread increase. We are in the profit “tent” of the trade (image below) and will benefit from theta as time passes and if DIS stays in this range. This is not always an easy position to understand, so please do reach out with Any questions!
7/12/2020 Update:
Disney moved up steadily this week and our profits in this position also increased quite nicely. There were Lots of opportunities to take this position off for more profit. One of the great things about 1×2 trades when they work is that you can put it on for a credit And take it off for a credit. As a reminder, we took in 0.81 for each 1×2 we put on. As of the close of the market on Friday, we could receive an additional 0.88 to take it off for a total profit of 1.69 ($169).
This is expiration week and you will likely need to take action – please remember to exit the position prior to expiration on Friday. If DIS is Well above 120 on Friday, you can let everything expire worthless. If DIS is Well below 115, you can let everything expire and take ownership of 100 shares. If it is anywhere near 115 to 120, you will want to take the position off or you will be Short 100 shares.
Feel free to simply take off the trade on Monday. Unless DIS gaps down to ~110 or so, the trade should still be very nicely profitable. When to take off these trades is a bit open – if you are Really interested in taking ownership of shares, you can hold it longer ‘hoping’ for a big drop in DIS. If you want to try and squeeze a bit more profit, it is currently a positive theta position and will increase in value if it stays at the same level or drifts down towards 115. Ultimately, we can’t ask for a much better outcome going into expiration week though, and simply taking the extra profit we’ve received is a good safe play and is what I would suggest for almost all traders! We’ll keep the commentary on this trade open until after expiration to see how the position plays out.
7/19/2020 Close/Update:
As mentioned in the email that went out this week, the position was closed for an additional $1.40 credit for a total win of $2.21. If you waited until the last minute to close, you would have collected a $1.35 credit as DIS ended at 118.65. This was really a great outcome for the trade and hopefully the extended commentary throughout helped. If you have any questions, please do reach out!
