More than a week ago, I entered a limit order to close my Disney (DIS) naked put for June. It was more than $5 out-0f-the-money (OTM) and was getting pretty cheap for as long as it had remaining before expiration. Finally, my order hit this morning. While DIS was trading at $84.01, I bought to close my one DIS June $77.50 naked put for $0.10 and paid $10.79 including commission. I saw no reason to keep the June put open when I could get out so cheaply. The risk was low, but the reward was almost non-existent. I estimate that I’m giving up less than 2.5% on an annual basis when I close an option this early for this little. At the same time, I usually open other positions that have much greater upside potential. The (literal) trade-off is an easy decision.
It’s interesting looking back at my last DIS trade. It was about six weeks ago and I expected the June $77.50 put to last until expiration. Even with nine weeks to go in the contract, I expected an annualized gain of more than 16%. By cutting three weeks and 10 cents off of the contract, I increased my annualized gain to more than 23%. That real difference is the benefit of taking profits early.
When I wrote about my thoughts on DIS two weeks ago in my May options expiration write-up, I said I was looking for further weakness or a reversal. I should’ve sold a new naked put that day on DIS, because around the time I wrote that post, DIS was at the recent low. I just didn’t know it. To top it off, I was slow to react to the reversal as DIS moved above its 10 and 20-day moving averages and hasn’t retreated back towards them in the past seven trading sessions. I expect this upward trend to slow, but I don’t expect the sell-off to be severe. More than just slowing, I actually expect DIS to make another run below these two moving averages soon, maybe as much as $2-3 below today’s low point.
Even with a possible little dip on the near horizon, I sold a new naked put this afternoon on DIS rather than waiting for a better premium. While DIS was trading at $83.91, I sold one DIS August $82.50 naked put for $2.33 and received $232.20 after paying $0.80 in commission. I debated this one for longer than I usually would have. Maybe it was because I wasn’t feeling well today and my brain was sluggish or because DIS is close to the top of its trading channel and looks like it could be due for a retracement from a technical view. I opted not to wait around and risk not getting the trade to hit at all because I was only selling one naked put worth less than 8% of my account value. Even if DIS falls 20% (which I don’t think it will for the next couple of years), I won’t lose my shirt if I’m willing to hold for another few years.
I’m confident enough in my longer-term outlook on DIS that I already have another limit order in place for a second DIS August naked put. Since I can see the possibility of DIS dropping as low as its 50-day moving average, I entered this other limit order, good for two weeks, for the August $80 strike and have it set for a $2.00 ask price, $0.55 above what I think I could have sold it for today. Depending on how fast DIS falls (if it falls at all), I think the premiums will rise faster than the time value will erode. I’ve seen premiums pop higher quickly on DIS and hope to catch a brief dip (like I’ve done before), only to see DIS pull itself higher within days. Now that I think about it, I might even raise my ask price by a quarter or so. I’ll see how DIS moves in the early part of next week before I make that change.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $232.20
- Potential return: 2.90%, 13.57% annualized
- Breakeven price: $80.18
- Downside protection: 4.48%
- Recent high: $84.38 (reached in the first hour of trading today)
- Cushion from recent high: 4.98%
- Expected support: $81.89 (and ascending) is the 20-day moving average (dma). It could provide a speed bump on a decline, but hasn’t proven to be a “magic” line for support on DIS. Support tends to surface a few days after the 20-dma breaks, then it slings back to the other side for a couple of weeks. This support beneath the 20-dma could coincide with the 50-dma which is also close to the 50% Fibonacci line around $80.37. The 50% Fib line has proven itself as strong support for DIS in the past and I don’t expect a change from that pattern this year. As a bonus, every tick above today’s high pushes that 50% Fib line even higher and gives me a better opportunity to profit from this trade.
- Position close goal/limit: I’ll try to close this put early if I can get out a month before expiration for $0.20. To the downside, I’ll ride it out and am willing to take an assignment as long as no horrific surprise news surfaces on DIS.