When I find a stock I like, I tend to stick with it for as long as it seems like it’s working. Disney (DIS) seems to be one of my favorite flavors still. It got a little ahead of itself and I decided not to chase it after I exited in late February. DIS was trading for $81.11 at the time and within five days, it bottomed at $78.86, but found its footing and then peaked at $83.65 on March 7. Since then the stock has slumped some and mostly moved sideways. I consider these past two months a good consolidation period and wouldn’t be surprised if we saw another drop down into the mid-$70s again before DIS moves much higher. Since I don’t want to risk missing the low that might already be in the books, I sold a single put on DIS early this afternoon.
While DIS was trading at $78.91, I sold one DIS June $77.50 naked put for $2.10 and received $209.20 after commission. I thought about selling two contracts, but I want to see if DIS moves towards its intraday low hit last week at $76.33 before getting in too deep. If it falls below that low, the chart will show DIS is in a downward trend still and I won’t want to have more than 100 shares at risk.
I sold this put because I think DIS will move higher again, even if it dips again in the near-term. Weekly options are available for much shorter duration contracts on DIS, but I wanted to have a couple of bucks in premium to cushion any further weakness as it works out its consolidation. The $75 strike premium had an acceptable premium (around 10.26% annualized), but since I was only selling one put, I figured I could take a little extra risk. I’m expecting investors to get downright giddy before the first of the next series of Star Wars movies hit the big screens. This will feed into merchandising too and lead to a long string of strong profits for Disney.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $209.20
- Potential return: 2.77%, 16.21% annualized
- Breakeven price: $75.41
- Downside protection: 4.44%
- Recent high: $83.65
- Cushion from recent high: 9.85%
- Expected support: $78.20 was the low a few days ago. This was the low trade of the day when DIS gapped higher. DIS bottomed at $76.33 last week. This was the lowest level hit in more than two months. Both of those levels could provide support, but an exact 10% correction from the March DIS high is just 13 cents below my break-even point. This 10% retracement level is where I expect stronger support to come into play. If DIS gets close to this and reverses higher, I’ll probably sell another put to catch the rally.
- Position close goal/limit: I’d like to ride this put until expiration or at least until it’s worth less than $0.25 during May. I might make an adjustment if DIS reaches back up to the $81.75-$82.00 range within a few weeks. This is where the trend line of lower highs is descending. I’ll be watching it closely and will either close my put early or buy a different DIS put to hedge.
I have a limit order in to close my UCO July $25 puts and will leave it, good-til-canceled. The underlying securities of my two May options (FEZ and F) are both trading almost dead at-the-money. I might enter an order for both to sell if either gets an intra-day spike. I have a paper profit on both, but want more and don’t want to buy the puts back at current prices yet. We have less than four weeks to go before May options expire, so time value should start melting away quickly soon. If these continue working in my favor, I might have my first option assignment of the year put to me (assigned) in June. XLF is trading in-the-money by more than the premium I received, but not by much. I have a couple of months to decide if I want to take a loss, take the assignment and sell covered calls or leave an order in to try to get out on an intraday spike in price (and drop in premium). XLF corrected more than 6% before heading higher again. Today, it hit resistance on its 50-day moving average, but had a second full day above its 100-day moving average. It makes XLF very interesting to watch for the rest of the week.