by Beth Gaston Moon | April 4, 2012 2:34 pm
Walt Disney (NYSE:DIS) has dipped lower along with the broader market today, and option traders are using the opportunity to place a large bullish bet using both call and put options. Roughly 35,000 option contracts traded on the stock Wednesday, quintupling the average daily option volume.
The lion’s share of this volume traded on the January 2013 50-strike call and the January 2013 35-strike put. By simultaneously buying calls and selling puts, traders are using what’s called a synthetic long stock strategy to simulate owning the shares.
According to optionMONSTER, the traders bought 15,300 of the calls for $1 apiece and sold the same number of puts for $1.55 each, netting a credit of 55 cents per spread (or $841,500 for the block). The put and call were relatively equidistant from the stock price and therefore out-of-the-money by the same amount. The put traded for a higher premium, however, because of its 31% implied volatility versus a 22% implied volatility on the call. This allowed the traders to net a larger credit for the spread.
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One difference between this strategy and owning the stock outright is what happens if the stock is trading between the call strike and the put strike when the options expire. Since this trade opened for a credit, the investor would simply keep this credit as both options expire worthless (see the profit/loss chart for more detail). Below the breakeven price of $34.45, losses begin to build all the way down to zero, because of the risk inherent in a short put.
The best-case scenario is if the stock rallies through the 50 level by the time the options expire in nine-and-a-half months. Beyond this strike price, gains are theoretically unlimited. But that’s a move of 17% from current levels. DIS is currently trying to break out into new-high territory, but first it has to overcome the $44 level, which rebuffed the stock’s attempted advances in early 2011 and earlier this year.
On the plus side, the shares have strong support in the form of their ascending 50-day moving average. Additionally, Disney’s Relative Strength Index (RSI) reading has been declining sharply for the past month and has now inched below 50, reducing the risk of an overbought situation.
DIS is up 14% in 2012 already but is virtually flat over the last 12 months. Does the stock have what it takes to muster a move above $50 and make a big winner out of today’s options trader?
As of this writing, Beth Gaston Moon does not own any shares mentioned here.
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