I think I’m going to have to change the way I blog. This thought process has been building for a couple of months and today I figured I’d mention it. Since I started this blog, I’ve blogged my trades on the day I make the trade to prove I wasn’t making up trades that looked like I was a genius trader a day or two later. Today, I caught myself debating whether or not to make a trade because I didn’t feel like I had the time to write a post about the details. That’s no way to manage money. As you’ll see, I made the trade and am posting later in the day than usual.
I plan to be less strict on my posts’ timing to avoid missing good trade opportunities after today. I’ll still try to post on the day I trade in most instances, but don’t be surprised if you read a few that come out a day or two later. I believe I’ve built up the credibility for this change over the past 6 1/2 years of blogging. You might have noticed that I’ve cut back on my weekly index charts too. I’ll try to be better about that in the future, but after my elbow surgery, I fell out of the habit and have enjoyed slacking. I might start posting those every other week. We’ll see. Now, on to the reason your are here…
This afternoon, I decided I couldn’t ignore how cheap my DIS puts for November were. They were $4 out-of-the-money and have less than two weeks before they expire. I continue to believe in the long-term outlook for DIS and figured I could risk raising my strike without too much downside risk. While DIS was trading at $68.84, I bought to close two DIS November $65 naked puts for $0.21 each and at the same time, sold to open two DIS January $67.50 naked puts for $2.31 each. I paid $2.91 in commission for the four contracts in the diagonal spread and received $417.09, and increased my total risk by $82.91 ($2.50 x2 – 417.09). The delta on the November puts is down to -0.1154 and the January puts have a delta of -0.4377. Both deltas were lower when I placed the limit order, but moved up when DIS dipped and my order hit.
I debated if I should go all of the way out to April to give me a bigger cushion, but don’t like to sell that far out on a calendar, unless it’s a leveraged ETF, far out-of-the-money. In hindsight, I probably should’ve given the December contracts more attention. The premiums are about $0.50 less and expire in 2/3 of the time. This difference means the annualized gain would be bigger with the December contracts and the cushion would be slightly less with the shorter duration. Traders will see this somewhat slight divergence in premiums between expirations when an earnings announcement is approaching. DIS announces earnings on Thursday. I’m expecting implied volatility to drop quickly after earnings. If DIS drops much and premiums rise, I might add one more contract since I like it longer term.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $460.63 (not including the November puts I closed)
- Potential return: 3.53%, 17.2% annualized
- Breakeven price: $65.20
- Downside protection: 5.29%
- Recent high: $69.87 on 10/25/13
- Cushion from recent high: 6.69%
- Expected support: $68, where support has held for the past two weeks, then $65.70, close to previous support and at the 38.2% Fibonacci line and close to the 50-day moving average. If all of that fails, DIS could retest its October low at $63.11. I’d be on a paper loss there, but would expect a strong recovery over the following few months.
- Position close goal/limit: If I can’t roll it early for a good profit, I plan to stick with it through expiration and take assignment for long-term hold.