I try to practice what I preach, and the occasional blogs where I chronicle my decision-making provide an opportunity to see just how well I’m doing. Today we’re dissecting a long stock turned naked put trade on Disney.
Following the March massacre, I went on a fishing expedition to bag a big one. Or, better yet, multiple big ones. Shopping for new stock purchases during bear markets is a gambit as old as the hills. The venerable Warren Buffet has taught, “to be greedy only when others are fearful,” and he has the investing record to back up the wisdom of the claim.
Disney is always on my radar, so when it crashed, I took notice. While I’d like to share how I nailed the March low and made a mint in the recovery, my tale is far less sexy than that. On May 8th, after a bona fide bottoming pattern had formed, I purchased shares for $108.58. As is my modus operandi, I started with a partial position to give myself the flexibility of adding more at lower prices. But I never got the chance.
By May 27th, DIS stock had quickly rallied to $120.98, gifting me with a quick 11% gain. Given its extreme overbought posture and ominous-looking bearish candle, I decided to take the profits and sit on the sidelines to await a better entry.
Over the next two days, the stock crumpled to as low as $114.12, but ultimately formed a bullish hammer candle near its unfilled gap. Given the almost $7 drop from my exit, I felt pretty good about the timing. But, the hammer candle suggested the next bounce could be imminent, and I didn’t want to miss out.
To increase my odds, I decided to sell a put this time instead of buying shares outright. So, on June 1st, when DIS pushed above the previous day’s high (about $117.50), I sold the July $105 put for $1.94. I felt like the $194 provided enough profit potential that I’d be satisfied if Mickey retook flight. At the same time, my breakeven was around 10% lower than the current price providing a wide profit range. Finally, since I was a willing buyer of Disney shares near the low $100s, I had the option to allow assignment if the stock plunged.
Fast forward to today, and here are the numbers. Disney sits at $113. The July $105 put has 15 days and a delta of 17. It’s worth 90 cents, pegging my unrealized gain at $104. So far, my decision to flip to naked puts was better than buying stock. Had I done the latter, I’d be sitting on a loss right now.
My target sits at 20 cents, so I still have a ways to go. Once I buyback the put, I’ll reload with an August one to keep the dream alive. If all goes well, Disney will provide ongoing opportunities to cash flow with naked puts and covered calls.
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