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.
