Disney ($DIS) is almost back up to my entry point at $90 and I decided to go ahead and plan my exit. While DIS was trading at $89.16, I sold one DIS December $92.50 covered call for $1.01 and received $100.51 after paying $0.49 in commission. If DIS breaks high above $93.50, I might second-guess my decision. I decided to make this trade because I expect some resistance, even if it is short-lived, at the September high of $91.19. I didn’t wait for DIS to get up there because it has already had a great bounce from its lows and I’m not positive it will get all of the way to $91 before taking a breather.
I’d like to be able to buy back this call for a profit and then sell my DIS shares above my entry point of $90.00. If I do that, I’ll sell another naked put to replace it. The risk/reward is the same, I just prefer to have the cash in my account so I can use it for other trades if/when I get back to being fully invested again. I set my strike above my $90 purchase price to try to squeeze out a little extra profit from the series of trades.
DIS Covered Call Risk/Reward Breakdown
- Potential profit from where DIS was when I sold the covered call: $545.25
- Potential return if exercised: 4.87%, 32.89% annualized
- Potential return if DIS stays flat and the call is not exercised: 1.12%, 7.59% annualized
- New cost per share, including all premiums: $87.09
- Downside protection gained from this trade: 1.08%
- Position close goal/limit: If DIS climbs above $91 and my covered call’s value drops enough due to time value erosion, I’ll get out early and start the series of trades over again with a new naked put with a January expiration probably. Another route would be to let this position run and sell a new naked put out-of-the-money to replace my DIS December $82.50 naked put that has already fallen under $0.80.
I was planning to add in a new naked put or two on this account today, but stayed too busy with client accounts to give my own account any attention. Hopefully, we get a dip tomorrow after today’s 1.17% gain for the large caps and the 2.75% gain on small caps. If we do, I’ll probably pick-up an ETF or two through naked puts.