Shares of Disney (DIS) nearly touched $100 yesterday for the first time in two months. The approach to the nice round number caught the attention of one trader Monday shortly after noon when the stock was $99.31, there was a buyer of an at the money ratio put spread in good size.
The trader paid 91 cents for 20,000 by 40,000 of the May 100 / 92.50 put spreads, paying $4.35 for 20,000 of the May 100 puts ($8,700,000 in premium) and selling 40,000 of the May 92.50 puts at $1.72 each, or $3.44 total ($6,880,000 in premium) for a net outlay of $1.82 million. Ratio spreads offer a fairly unique risk profile, and one that those new to options trading may be very unfamiliar with. Let’s break down how this trade makes or loses money.
The premium outlay is $1.92 million or 91 cents, if the stock is $100 or higher on May expiration than the trader would lose the total cost of the trade. If the stock is between $99.09 (long put strike less premium paid) and 92.50, the trade can make up to $6.59, or $13.18 million. Below $92.50 and between $85.91 (short put strike less the profits between the long and short strike) the payout of the trade trails off, just as it would show gains between $92.50 and $99.09. Below $85.91, down 13% the trade becomes a loser.
This trade was repeated today, but in smaller size when DIS was $98.22, the trader paid 91 cents for another 10,000 by 20,000 contracts.
I would add one more point, DIS’s 52 week lows are $86.25, last month after earnings, which is also roughly the point at which the trade starts becoming a loser. So the trader is targeting a move lower, but not a disaster scenario where there are new lows. Or they are long stock, looking for protection within a range but are willing to buy more stock (be put the stock) if there is a large move lower.
For those of you who are trying to get a sense why some one would do a trade like this, it could be protection against a long position, but I would add that this trade has very little delta exposure given the ratio until we get closer to expiration, the stock stays in the money and the short strike decays.
Lastly, the chart, yeah $100 is kind of the thing: