$DIS – Considering Our Options

by Dan May 7, 2013 3:35 pm • Commentary

Disney reports earnings after the close, the implied move in the options market is about 4% which is rich to the 4 qtr avg move of about 3.3%.  I wanted to quickly look at a losing trade that I initiated 2 weeks ago on April 26th:

TRADE: DIS ($61.85) Sold the May 62.50/65 Call Spread at .75
  • Sold 1 DIS May 62.50 Call at 1.10
  • Bought 1 DIS May 65 Call for .35


Since selling this call spread, the stock has ripped four dollars higher through both of my  strikes. Let’s look at our options right now:

1. Close it out now for about a $1.05 loss,

I could close the trade right here for about 1.80, a 1.05 loss. That would hurt but it hurts less than the scenario of Disney going higher from here over the next week which would mean the spread could expire at 2.50, or a 1.75 loss. And here’s the biggest problem with the position right now. When I sold the spread it was entirely out-of-the-money, which means that the closer you get to earnings (barring a strong move higher) the less the spread is worth. Currently, the spread is above my high strike, meaning the opposite is true. Not only do I need Disney to stop going higher, it needs to go down more than just a little for me to avoid losing even more money on the structure. Even if Disney closed lower than it is right now, say at 65, I would lose more than what I’m down now in the trade. I actually need DIS below 64.30 by next Friday to even do better than if I were to close it now. And to make money on the trade I need it below 63.25. Another way of looking at the position is that I am synthetically long the 65/62.5 put spread for 1.75.


2. Let it ride into the report and hope for a pull back in the 8 days left to expiration.

Based on the fact that even though it is down 1.05 it can only lose another 70c in a stock that has had an amazing run of late and is sitting at its highs. As explained above alot needs to go right to not lose even more money in the structure, but the stock’s action of late makes that at least a possibility.

MY VIEW:  I have a loser on my hands, and rather than compound it by rolling up the strikes and doubling down I am going to stick with what I have and look to get out for a smaller loss or possibly break-even over the next 8 trading days as I feel even more confident that there is a good bit of good news in the stock at all time highs that are 6.5% higher than when I conceived of the idea.