Long-Term Bull Put Spread Provides Opportunities for Disney Bulls

Disney (DIS) is currently one of the most oversold stocks in the Dow Jones Index but is holding nicely above the 200-day moving average while showing good accumulation.

Options flow was positive on Friday with net trade sentiment of +$101,700 and a delta imbalance of 33,763.

Analysts maintain a positive outlook for DIS stock with 20 Strong Buy ratings, 2 Moderate Buy ratings and 6 Hold ratings.

DIS BULL PUT SPREAD

Today, we’re going to look at a bull put spread trade, but instead of using a regular monthly expiration, we will look at a longer-term trade.

Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.

As a reminder, a bull put spread is a bullish trade that also can benefit from a drop in implied volatility.

The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

Implied volatility is currently sitting at 23.56% which gives DIS and IV Percentile of 42% and an IV Rank of 15.30%.

To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.

If we go out to December, we could sell the December 19 put with a strike price of $100 and buy the $95 put, which would create a bull put spread.

This spread was trading yesterday for around $0.57. That means a trader selling this spread would receive $57 in option premium and would have a maximum risk of $443.

That represents a 12.87% return on risk between now and December 19 if DIS stock remains above $100.

If DIS stock closes below $95 on the expiration date the trade loses the full $443.

The breakeven point for the bull put spread is $99.43 which is calculated as $100 less the $0.57 option premium per contract.

That breakeven price is around 12.37% below Friday’s closing price.

Conclusion And Risk Management

One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $57, so we could set a stop loss equal to the premium received, or a loss of around $57.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be if the stock breaks through the key level of $105.

Please remember that options are risky, and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com