I missed opportunities through most of last week to roll my DIS naked put while DIS was below my strike, but I figured I’d gain more on the underlying stock’s growth through the intrinsic value than I’d lose in extrinsic value drop of the new option. Based on the way I ended up making the trade, I think I would’ve done better if I made the trade while DIS was cheaper.
While DIS was trading at $110.98, I bought to close one DIS June $110 naked put for $0.22 and sold to open on DIS August $115 naked put for $5.77. I received $553.61 for the $5.55 diagonal put spread after paying $1.39 in commission. DIS was trading at $11.20 when I entered my limit order, so I was happy to have the order hit today versus letting it get away from me over the next two days as I waited for some more time value (theta) to erode.
I could’ve left the June put to expire worthless in two and a half days, but didn’t want to risk another sudden drop while I’m selling my new put in the money. I’d rather spend $22 than get overextended needlessly. I don’t think the downside risk in DIS is too great, so picking up an extra 100 shares of the stock might not have been a bad idea on a dip, but I can always sell another put if I see DIS drop again soon.
I decided to sell the August contract because the only other two choices were July and October. July was too short-term and October was too far away for my ideal set-up. August was right about where I like it, between eight and 10 weeks out. The premiums are decent at that duration and the annualized gains are still acceptable, especially when selling in the money.
The strike took a little more debate. I considered a straight calendar spread and just rolling out to August $110. The annualized return was fair, around 15%, and the cushion was good too, around 3.72%. However, since I don’t think DIS is going to fall much, if any, I thought I could accept more risk and reach for a better return. I don’t know how much upside there is in DIS until we get closer to their next few major movie releases, but do believe that DIS will be well over $115 within a year.
I used this same strategy of selling in the money with the June put I just bought back. DIS gained $4.26 in that time span and I gained the equivalent of $5.0784 per share. Options have proven to be the right strategy with DIS for most of my recent trades and I see no reason to change yet.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $576.30
- Potential return: 5.28%, 28.88% annualized
- Breakeven price: $109.24
- Downside protection: 1.57%
- Recent high: $113.22 on 5/5/15
- Cushion from recent high: 3.52%
- Expected support: I drew three trend lines that could work for support. The lowest one uses the two low points since February 5. This line shows support should work by $109.00 (ish). The middle line follows a collection of lows that marks more frequent touches to the trend line and is closer to $110.00. The highest line ignores more of the intraday lows while following the most frequent floor for dips. It’s around $110.50. The 10 and 20-day moving averages are above $110 and just turned higher again (bullish signal). I don’t really think DIS will fall below $109 again in the near-term and might not drop below $110 again either.
- Position close goal/limit: I only sold one put so I would be willing to take an assignment on a decent retracement. This is the same sentence I wrote when I sold the June put that I just bought to close and I have the same outlook on DIS still.