One of the advantages of following just a few stocks closely is that you get to know their behavior. While I don’t claim to be able to forecast every move that DIS makes, certain set-ups do create fairly predictable price movements. I mentioned in my last update that I was waiting for DIS to drop back to its 10-day moving average. It hit new highs yesterday morning after touching its trend line of higher highs, but then faltered. This morning, DIS fell below its 10-day moving average by $0.08 before recovering. I should’ve had a limit order in place waiting for the drop, but didn’t. I hesitated so I could see if DIS fell all of the way to its 20-day moving average before recovering. While today might not be the near-term bottom, I opted to move forward with my trade while DIS was down more than $2.00 from its intraday high yesterday.
While DIS was trading at $118.09, I sold one DIS January $115 naked put for $3.00 and received $299.20 after paying $0.80 in commission. Deciding to sell another DIS put was easy. I’m still bullish on DIS over the next couple of years. I considered selling the put in the money at the $120 strike, but the $115 strike is giving me a good return for much less risk. I’m also watching DIS’ P/E ratio. The forward P/E is up to 19.0 now and I’m concerned it’s getting a little ahead of itself. My expectation is that it’ll cool off at some point soon and trade between $113-$123 before breaking out again. In fact, I sold covered calls at the $125 strike for some of my clients based on the belief that above $125 (plus the premium) is getting into thin air.
Before selling the January contract, I also looked at the February contract, but decided to keep the duration shorter for a better annualized return. I don’t mind giving up a little from the annualized gain on some trades if I want a better cushion from a loss, but with my bullish outlook on DIS, I can weather another dip that’s bigger than a few percent.
DIS Naked Put Risk/Reward Breakdown
- Potential profit: $299.20
- Potential return: 2.67%, 17.81% annualized
- Breakeven price: $112.01
- Downside protection: 5.15%
- Recent high: $122.07 on 8/4/15 and $120.64 yesterday, 11/23/15
- Cushion from recent high: %
- Expected support: $110.81 was the low on November 4 and $113.38 was the intraday low on November 16. When I draw a trend line of higher lows using these two bottoms, I see that DIS could fall as low as $116 without breaking the trend. I’d like to see this line hold support, but I used a lower area of support for my decision making. The 50, 100 and 200-day moving averages all fall between $109.19 and $109.76 and the 50% Fibonacci retracement is at the low end of that range. Each one of these moving averages could offer support and the 50-day moving average should be close to, if not above, $112 by the time DIS fell that far. By January expiration, I’ll probably wish that I had gone with the $120 strike, but I’m playing it safer after such a monstrous run higher since the end of September.
- Position close goal/limit: I’m repeating what I wrote the last time I sold a DIS naked put. I’m willing to take an assignment on DIS and do not plan to sell my shares unless Star Wars disappoints at the box office, Star Wars merchandise doesn’t sell well during Christmas and Shanghai Disney tanks. In other words, I’m comfortable selling covered calls far out of the money and waiting for it to recover.