Disney (DIS) has had a tough run in the last twelve months, but seems to have found a floor around $80 per share.
Today, I’ll walk your through a strategy for Disney earnings that take advantage of time decay and volatility skew.
The strategy involves selling an out-of-the-money put for a near term expiry and then buying a put for around the same price using a later expiry.
The idea with the trade is that the stock might fall a little bit more, but should stay above the short strike price.
We’re also selling the higher volatility in the short-term option and buying the lower volatility in the long-term option.
Let’s look at how it works.
Disney Diagonal Put Spread for Earnings
The trade I’m looking at is selling a November 10 put with a strike price of $77 and buying a November 24 put with a strike price of $75.
As of yesterday’s close, the November 10 put could be sold for around $1.20 and the November 24 put could be bought for $1.00.
That results in a net credit for the trade of $20, which also means there is no risk on the upside. The worst that can happen is both puts expire worthless and we keep the $20.
The risk on the trade is on the downside with a potential maximum loss of $180. This is calculated by taking the difference in the spread (2) multiplied by 100 and subtracting the credit received ($20).
The maximum potential gain is around $180 which would occur if DIS closes right at $77 on November 10.
The trade has a nice profit zone in between $74 and $87.
Aiming for a return of around 10-15% makes sense and I would set a similar stop loss.
The worst-case scenario is a sharp drop in DIS stock early in the trade. For this reason, if the stock drops below $77 in the next few days, I would also consider closing the trade early to minimize losses.
The initial trade set up has a delta of 6 meaning the position is roughly equivalent to owning 6 shares of DIS stock. Note that this delta number can change significantly as the stock starts to move.
Below is the payoff graph with the blue line representing the profit or loss at expiration and the purple line being the trade as of today.
Trades held over earnings can be a bit hit or miss and are very hard to adjust if they go south. But, as long as Dis stays above $77, the trade should do just fine.
Earnings are scheduled for November 8th.
Disney Company Details
The Barchart Technical Opinion rating is an 88% Sell with a weakening short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.
Walt Disney Company has assets that span movies, television, publishing and theme parks.
In October 2020, Disney reorganized its media and entertainment operations, which had been previously reported in three segments: Media Networks, Studio Entertainment and Direct-to-Consumer & International.
From the first quarter of fiscal 2021, Disney began reporting the financial results of the media and entertainment businesses as one segment, Disney Media and Entertainment Distribution (DMED) across three significant lines of businesses: Linear Networks, Direct to- Consumer and Content Sales/Licensing.
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. For more information please view the Barchart Disclosure Policy here.
