In early March, I shared a bearish trade idea into Walt Disney Co (NYSE:DIS). Obviously the thesis quickly revealed itself wrong. Luckily my trade setup to short DIS stock was a net credit so I managed out of it with no damage. What I lost in the debit put spread, I gain in the sold puts that had financed the bet.
Today I want to flip flop and commit long Disney stock, not because I like chasing runaway stocks but because of the thesis that DIS stock could be for sale. I personally think it’s unlikely, but what I think doesn’t matter. I am selling risk against what Wall Street believes. Perception is everything, and if traders think that a buyout headline is coming they would be less willing to short and more eager to buy dips if they come.
Fundamentally, Disney is a proven performer with a long-term rosy outlook. Technically is where DIS stock gets interesting, though. It recently crossed into a long-term breakout from a trend line that could have another 8% upside potential. This would put it within striking range of its all-time highs.
Click to Enlarge The rally has been fierce and most investors would shy away from it, fearing being late entrants. I don’t blame them. Buying a stock near its all-time highs and after a long run is often a mistake waiting to happen.
I am conservative so I prefer to not risk $115 per share without any room for error. My money would be at risk immediately. They say invest for the long term, but I prefer to be patient and find a better way.
For that, I can use the options markets to structure an entry now that allow for a comfortable 15% margin for error.
DIS Stock Trade Idea
The Bet: Sell the DIS Sep $100 put for $1.50 per contract. This bullish trade is designed to expire worthless for maximum gains with 85% theoretical certainty. If Disney stock falls below $98.50 per share, I will accrue losses.
I could do a credit put spread instead to limit the risk exposure and make it more suitable for even more conservative traders or smaller accounts.
Since there is a chance that a buyout headline could come, as slim as it may be, I will refrain from selling opposing upside risk for balance. I am fairly confident that I will be able to manage my bullish risk against short term dips.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. 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.
