Rolled DIS and BABA Options

A few days ago, I entered a limit order to close my DIS put that I sold near the bottom of the stock’s recent correction.  Within the first two minutes of trading today, my order hit and while DIS was trading at $90.34, I bought to close my one DIS December $82.50 put for $0.30 and paid $30.53 including commission.  I finished with a realized gain of $308.97 on this leg.  I didn’t see the need to keep this far out-of-the-money put open for the next six weeks just to earn another $30.  I don’t think DIS will fall that far again any time soon, but it makes more sense to cut my risk and make more directing my cash elsewhere.

Since DIS was trading above my purchase price and I had a small profit on my covered call, I decided to exit both sides of the position and start over.  To save a minute of set-up time, I entered my orders individually rather than as a combination.  The result wasn’t very different in the end.  I might have used more time legging out of these positions and I might have been able to make an extra few bucks if I had combined the orders, but then again, I might not have been able to get them to hit as quickly either.  This series of adjustments started when I sold my 100 shares of DIS for $90.213 and received $9,020.70 after paying $0.60 in commission.  This trade gave me a realized gain of $20.70 on the shares, not counting the $190.51 in premiums I received from selling the put that was assigned last month.

I turned around and entered a limit order to sell my covered call as it looked like DIS was starting to ease off its morning highs.  Instead, DIS turned higher again and I had to adjust my limit order by a couple of cents.  While DIS was trading at $90.31, I bought to close my one DIS December $92.50 covered call for $0.80 and paid $80.49 including commission.  I finished with a profit of $20.02 on the covered call.

I’m still bullish on DIS.  I just wanted to clear my books after being assigned the shares before the end of the year and saw today as a good opportunity to do it easily.  I also wanted to lower my risk a little and I thought it’d be better to close the $92.50 covered call and sell a new put at the $90 strike.  While DIS was trading at $90.34, I sold one DIS January $90 naked put for $2.86 and received $285.50 after paying $0.50 in commission.  The difference was $1.59 less of downside risk (based on the price of DIS when I sold the put, the lower strike and $2.05 more in net premiums).  I’ll miss out on more upside potential with the lower strike, but the boost in premiums cuts the upside difference down to only about $0.91.  I’m willing to exchange $0.91 in potential gains for an extra $1.59 in added cushion.

DIS Naked Put Risk/Reward Breakdown

• Potential profit: $285.50
• Potential return: 3.26%, 18.06% annualized
• Breakeven price: $87.16
• Downside protection: 3.53%
• Recent high: $91.99, hit on 11/6/14
• Cushion from recent high: 5.26%
• Expected support: The ascending 20-day moving average is at $89.24 and could provide support.  I’m looking at the 50-day moving average at $88.57 to be a more likely level of support that lasts.  It worked within $0.06 on November 7, when DIS gapped lower.
• Position close goal/limit:  I only sold one put so I would be willing to take an assignment on any weakness.  DIS might bounce around some in the coming months, but I expect it to be much higher within a couple of years.  Like the last time DIS corrected, I plan to sell another put if it drops 10% again.

After I finished with DIS, I noticed my December BABA put had fallen to show cheap bid and ask prices of $0.05 and $0.20 respectfully.  I entered a limit order to close my December put for a dime and started planning my next BABA trade.  While BABA was trading at $118.98, I sold one BABA January $110 put for $4.60 and received $460.05 after getting a $0.05 commission rebate.

I waited another 20 minutes and saw BABA was starting to drop in price, so I raised my limit order and while BABA was trading at $118.25, I bought to close one BABA December $87.50 put for $0.15 and paid $15.91 including commission.  Like with my DIS put that was far out-of-the-money, I don’t expect BABA to fall that far, but for less money than I spent to buy back the lower DIS put, closing the December BABA put didn’t take much thought.

BABA Naked Put Risk/Reward Breakdown

• Potential profit: $460.05
• Potential return: 4.36%, 24.15% annualized
• Breakeven price: $105.40
• Downside protection: 10.87%
• Recent high: $120.00, hit today, about 15 minutes before my trade
• Cushion from recent high: 12.17%
• Expected support: The low from this week is $113.71.  I’d like to see that mark hold, but the intraday low from last Friday of $111.82, when BABA gapped higher, is more important in my view.  It’s just an edge higher than the previous day’s high and is worth watching.  Speaking of the previous day, its low of $107.22 is my next level of expected support along with the high from a couple of days earlier at $106.35.  The 61.8% Fibonacci line is a few cents below that mark and should provide solid support if BABA makes it that low again.
• Position close goal/limit:  I don’t see a near-term catalyst to take BABA down severely.  Any selling before my put expires would probably be based on a short-term sentiment shift.  I plan to try to ride it out unless there is some news that changes my mind.  I saw Jack Ma, the BABA Founder/CEO, interviewed yesterday and believe he has a reasonable plan to grow the business.  Being in China, it has different risks, but that’s why my potential return is so good.  This is my single risky trade right now, but I like the balance of risk and reward.