Fundamentally, Walt Disney Co (NYSE:DIS) is sound. Management is proven and the company owns many globally recognized assets. Its movies are astoundingly successful. Yet, DIS stock suffers sporadic selloffs after strong rallies.
Recently, I traded DIS from the long side based on technical setups. But the DIS bulls are taking their time to break out, so I now favor the bearish side. Before you unleash the House of Mouse posse after me, I am not dissing the company. What I am doing is shorting the Disney price action. Disney’s fundamentals remain strong.
Click to Enlarge Shorting a stock outright has unlimited risk. Therefore, I only do it using the options markets where I could sell call spreads, but this time I will opt to buy debit put spreads instead.
The Trade: Buy the Disney 13 April $108 put. This is a bearish trade and it costs $1 per contract to open. The faster and sooner that DIS stock falls toward my strike, the bigger my profits will be. The cost of entry is my maximum loss potential. Time is my enemy, especially if price moves against me.
I usually like to lower my out-of-pocket expense. In this case, I want to sell downside risk against the aforementioned strong fundamentals. Meaning, that even though I believe there could be downside in the short term, eventually buyers will step in to defend Disney based on valuation.
The Bank: Sell the Disney Oct $90 put. This is a bullish trade for which I collect $1.30 per contract to open. By selling this put, I am committing to owning the stock at $90 per share if it falls below it.
Essentially I would getting paid to be short DIS stock, as long as it stays above my sold October put. Any premium I capture from selling my bearish put bought is pure profit. This trade will profit even if Disney stock does nothing.
Selling naked puts is dangerous. I only do it if I am willing and able to own Disney stock at the strike sold.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
