Since the middle of August we have been of the mindset that the new-found volatility in our equity markets have established new trading range opportunities. And opportunities in particular to use options to express directional views in stocks when they are near term oversold (Name Those Trades: Get Your Good ‘Til Cancel Bids $AAPL $DIS), and near term overbought (Name That Trade – $DIS: Let it go). We are in a nimble traders market with massive intra-week percentage swings the new norm. Today is one of those days as our ideal entry in DIS came and went almost instantly.
The two posts (above) have highlighted Disney (DIS) as a suddenly interesting trading vehicle. What’s unique to us about DIS is that the stock’s breakdown came from an all time high, on disappointing fundamental news from universally bullish sentiment PRIOR to the market correction.
Today, DIS retested an important technical level ($105) which was the prior breakdown level before the blood-letting on August 24th, and also the stock’s 200 day moving average. At least for the moment it has failed:
Short dated options prices have come in almost 30% from the recent multi-year highs. Unless the market shakes everything off and grinds back towards the highs, vol is unlikely to come in a heck of a lot more from here. 30 day implied vol is unlikely to fall below 20 for quite some time:
[caption id="attachment_56735" align="aligncenter" width="600"]
DIS 1yr chart of 30 day at the money IV from Bloomberg[/caption]
The next identifiable catalyst for DIS is not until early November, when the company will report their fiscal Q4 results. In the mean time the stock is in the hands of the broad market.
In the name that trade post last week, we identified 105 as an ideal entry but were concerned about the high level of implied volatility and therefore focused on a trade structure that alleviated the concern about collapsing vols by selling an upside call spread to buy a put spread. With the vol a little lower but still somewhat elevated we like the idea of timing an aggressive at the money put spread, getting good deltas for a reversal while taking advantage of big downside skew with the sale of the lower put. So once again, we’ll wait for closer to our ideal entry, but likely with a simplified trade. (unfortunately we missed the entry this morning closer to $105).
Hypothetical Trade – Buy the $DIS ($103.20) October 105/95 put spread for $3
- Bought to open 1 Oct 105 put for 4.05
- Sold to open 1 Oct 95 put at 1.05
Break-Even on Oct Expiration:
Profits: between 102 and 95 make up to 7 with max gain of 7 below 95
Losses: up to 3 between 102 and 105 with max loss of 3 above 105
Rationale – this trade targets a pullback from the 200 day moving average and upside resistance back towards the middle of the new range DIS just established. We like the in the money aspect of the trade structure to help mitigate any further decline in vol in the near term.