While I realize that not every trade in Walt Disney Co (NYSE:DIS) stock is going to be as easy as the trade that delivered profits quickly and for free, I am confident that I can repeat performance without much trouble.
Disney’s fundamentals are beyond reproach, as it’s been a proven performer for decades. Its management pedigree is enviable and it executes its plans with mastery.
The Disney stock performance at times gives the impression of lackluster results, but that is merely investor sentiment that tends to be fickle. Wall Street’s reactions, at times, leaves me wondering about sellers’ reckless behavior and therein lie the opportunities.
On dips, DIS stock has been a profit machine. When everyone else is selling, I sell premiums against the irrational fears. The trick is to find proven support against which to sell premium for income.
Before you label me a DIS perma-bull, consider that I shorted DIS stock on May 2 just before it dipped 6% in six days. So why short it after drumming up its fundamentals? I was merely profiting from the price action — I saw an opportunity and I took it.
Click to Enlarge Today, a similar technical threat still exists, but $5 lower than that of May 2. So why not short it again?
Now, with profits in hand, I want to sell risk against others’ fear of a repeat dip. Most will fear a similar trend breaking and that is the unease from which I want to profit. Selling downside risk into fear usually results in elevated premiums, which if correct yield easier profits.
The Bet: Sell the DIS Dec $90 put and collect $1.10 to open. With that, I have a 90% theoretical chance of keeping the entire premium collected for maximum gains, but I would accrue losses if the DIS stock price falls below $88.90 per share.
If you are not willing to withstand some heat, or if you’re unable or unwilling to own Disney shares, then you should contemplate switching the trade into a spread instead.
The Alternate: Sell the DIS Dec $90/$85 credit put spread where the risk is much smaller than the naked put yet still could yield 8% in return. Compare this with buying the stock out right and risking $110 with absolutely no room for error. DIS stock would then need to rally 8% to match the performance of the spread.
Learn how to generate income from options 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.