Yesterday we previewed two earnings after the close, Disney (DIS) and Nvidia (NVDA). In both we offered a hedge for those that are long stock, and a bullish (or stock alternative) with very small defined risk for those that wanted long exposure without big risk. With the earnings out of the way and the stocks having moved in opposite directions, let’s check in on the trade ideas.
First in DIS, which is down about 2.5%. Here was the hedge from yesterday:
DIS ($112) Buy May 111 / 106 put spread for $1.20
- Buy 1 May 111 put for 1.60
- Sell 1 May 106 put at 40 cents
With the stock now 109.25 this put spread is worth 1.80, so chipping in a little on the move. It’s real strength is what happens next as it’s essentially locking in the stock down to 106. As far as the trade itself, it’s only intrinsically worth .75 here, so any sideways or moves higher in the stock risks all those gains.
Now let’s look at the bullish idea. This was mildly bullish, to say the least, selling a near-term call to finance a further out call. Here it was:
DIS ($112) Buy the June / Dec 115 call calendar for $3
- Sell 1 June 115 call at 1.45
- Buy 1 Dec 115 call for 4.45
This is basically unchanged, down maybe 10-20c with the move lower in the stock. There’s not a ton to be done here if the goal is to stay bullish through year end. Perhaps taking off the July calls at some point and rolling them up and out to create a Dec call spread. But the timing of that would be better with the stock higher as the December calls will gain a lot more than the June calls on moves higher. The risk, of course, is if the stock continues lower as this trade is long deltas.
Now let’s look at the more exciting move. NVDA is up 15%. The hedge we selected was intended to be as little premium as possible, defining risk in the stock to the downside and allowing complete freedom for the stock to go higher on the upside. That worked. With the stock’s gains of nearly $16 the hedge is worthless but only cost 1.50. That’s the way you want that to work in volatile stocks.
The next thing to look at is the bullish trade in NVDA, here it was, from yesterday:
Defined Risk Bullish
NVDA (104) Buy the May12th 105/115/125 fly for 2.50
- Buy 1 May12th 105 call for 4.00
- Sell 2 May12th 115 calls at .80 (1.60 total)
- Buy 1 May12th 125 call for .10
The stock obviously outperformed the implied move as is through our target price. But it’s a nice winner, worth abut $6 vs the 2.50 paid. It’s basically stock here (short stock) with just a little bit of extrinsic premium left on the 115 line. Therefore, as far as trade management, it should be closed for a profit at some point, the risk to existing profits being the stock goes higher, the more profits if the stock goes lower towards 115.