After writing my earlier post for my Ford naked puts, I left my desk for an appointment. By the time I got home to check how the day ended, I saw that the markets’ slide picked up some pace and along with it, Disney (DIS) fell deeper. As I’ve mentioned in a couple of earlier posts, I’ve been expecting DIS to retreat. I’m not sure why I didn’t buy a put on it since I was pretty sure DIS would move south before heading north again. For whatever reason, I didn’t. However, I did place a limit order last week to sell naked puts if my prediction was correct. I priced it far above the bid/ask with the assumption that DIS would drop from nearly $77 to the lower $70s. I didn’t get overly aggressive with my order with a very high ask price because I wanted to make sure the order would hit on a smaller dip.
While DIS was trading at $73.16 this afternoon, I sold two DIS April $72.50 naked puts for $2.75 each and received $548.75 after paying $1.25 in commission. The 9+% rise in the VIX today helped my order hit sooner than I expected. I was starting to get afraid that DIS wouldn’t fall enough for me, but it finished the day down 2.81% and that’s after bottoming $0.22 lower in the final hour of the trading day.
My puts are still out of the money, but now I’m not sure if that’ll last long. DIS’ 50-day moving average is close to $71.50. This level is also close to where I’ve drawn a trend line of higher lows that started in October 2013. I don’t think DIS will break below these indicators, but if it does, maybe it’ll fall into the upper $60s, where previous support worked. This latter range is partly what I built my order around. I could see DIS fall as deep as break-even on my puts and then watch it rally, preferably while I own it. Actually, if I’m going to list my preference, it’d be to take the premiums I just received and not have to buy the stock. If I am assigned the shares, I’m still bullish on DIS’ longer-term outlook. It might take longer than planned, but I don’t think I’ll have a hard time making a profit on today’s trade.
I’m not fully invested yet, even after today’s two trades. Tomorrow will be interesting since we’ll be able to see if the broad sell-off has the chance to bounce back or turn into something real. I’d still like to see stocks sell-off a little more before rebounding. If I think the selling could get worse, I might take some profits on other puts I’m short to set myself up for reinvesting at lower levels. More than likely, I’ll let everything stay in play and risk some option assignments below today’s prices.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $548.75
- Potential return: 3.93%, 14.7% annualized
- Breakeven price: $69.76
- Downside protection: 4.65%
- Recent high: $76.82 on 1/6/14
- Cushion from recent high: 9.20%
- Expected support: $71.50, then $69.50
- Position close goal/limit: I’ll take an assignment on these 200 shares if DIS continues to fall. Long-term, I’m happy to be an owner if needed.