Back on November 10th, in the midst of the previous earnings season, we previewed Disney’s Q4 release and detailed two bullish trade ideas, one near term and one long term. Here was the rationale and trade ideas from that time:
Here are two defined risk trade ideas for those who think DIS has bottomed, that the stock will bounce after results and guidance that are not as bad as expected, and look to target a reasonable short term bounce, and one that allows for more time and a more sustained rally:
Short term:
DIS ($95.75) Buy the November 18th 96 / 100/ 104 call Butterfly for $1
- Buy 1 Nov 96 call for 1.45
- Sell 2 Nov 100 calls at 25 each or 50 cents total
- Buy 1 Nov 104 call for 5 cents
Intermediate term:
DIS ($95.75) Buy the January 97.50 / 105 call spread for $1.60
- Buy 1 Jan 97.50 call for 1.90
- Sell 1 Jan 105 calls at 30 cents
This is a situation where both trade ideas seemed to be the correct structure for each time horizon. It’s also indicative of a general rule of thumb on how we use flies versus call spreads. We like to use butterflies near term, you rarely see us go out more than 2 months on those trades. The reason is because it takes a while for gains in a fly to be realized as once it gets into the money, you need to be patient and let the guts of the fly decay each day in order to realize the intrinsic value. The only time we use flies farther than 2 months out is if they are extremely wide flies, where a move towards to target realizes enough profits in the case of a near term move, that patience is not needed.
So back to these trades, the near term fly in November expiration was the correct trade idea as the stock closed 98.24, making the fly worth 2.24 (vs the original 1.00) at expiration.
In the case of the the January call spread, it expires this week. And after the stock’s sustained rally over the past few months, is worth it’s maximum value of 7.50 versus the original 1.60 risked. That turned otu to be a really great trade as what was risked originally was less than the implied move for the earnings itself, and then had 2 months of possible gains on a sustained rally, which we got.