I’ve been a steady fan of Disney (DIS) for a while and would have done better over the past year by buying shares rather than selling naked puts. However, I know that the stock will stumble along its way higher again, as it did when I was assigned a put in October 2014. So, I decided to stick with selling options on DIS rather than jumping in with more than $9,500 to buy the shares.
While DIS was trading at $95.29, I sold one DIS March $95 naked put for $2.32 and received $231.27 after paying $0.73 in commission. It’s not a big dollar trade, but the potential return is good and I’ll probably sell another put if DIS drops a few percent again. I knew I was going to get back into DIS after my last option expired, but I didn’t prioritize my account high enough on my to do list and missed weakness in the price mid-week.
By the time I got around to making the trade today, I already knew I wanted to sell the $95 strike. The $92.50 strikes didn’t have good premiums since they were so far out of the money and the $97.50 strikes were above the all-time high for DIS and didn’t give much of a risk-break. I only had to decide what expiration to sell. The March and April contracts were the only ones I considered since I wanted to sell more than a month out and no more than three months out. The April contracts only offered about a 0.5% better cushion while the March contract’s annualized return was 3.01% better. I figure, the more I can pick up an extra percent or three on trades, the easier it is to stomach the losses when they inevitably hit.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $231.27
- Potential return: 2.50%, 16.03% annualized
- Breakeven price: $92.69
- Downside protection: 2.73%
- Recent high: $96.42 on 1/13/14
- Cushion from recent high: 3.87%
- Expected support: DIS has moved in a narrow trading range after it dropped from its new all-time high last week. $93.75 could act as support, but the ascending 50-day moving average (at $92.72 and rising) appears to be a more likely level to stop any further weakness. This moving average is just above a trend line of higher lows that goes back to October 2014. The 100-day moving average is at $90.66 and slowly moving higher. It could slow a slide, but the low from mid-December, just above $90.00 looks like it could offer better support if DIS makes that much of a retreat.
- Position close goal/limit: I only sold one put so I would be willing to take an assignment on another dip. I don’t plan to sell another put until DIS is below $92.50 and then I’d like to see some stability before pulling the trigger.
I have a limit order on new UWM naked puts that I should’ve sold earlier in the week also, but based on how the market closed this afternoon, I might get another chance soon. I left my order in place and will adjust it if needed next week.
BABA made it above $105 today, briefly. It has been on a great run since I took the assignment. I could get out of owning it with a covered call sometime soon and finish with a profit, but I’d rather stick with it for longer as it recovers. If the shares look like they are heading lower again, I might go ahead and make the trade to reduce my cost per share again.