Disney (DIS) stock was a bearish candidate that came up on one of my screeners for being rated a 100% Sell and ranking in the Top 1% of all short term signal directions.
Today, we’re going to look at a Bear Put spread trade that assumes Disney will continue to drop over the next two months.
A Bear Put spread is a bearish trade that also benefits from a rise in implied volatility.
The maximum risk for a Bear Put spread is limited to the premium paid while the maximum potential profit is also capped.
The maximum profit is equal to the width between the strikes less the premium paid.
Disney Bear Call Spread
To create a Bear Put spread, we buy an out-of-the-money put and then sell another put further out-of-the-money.
Buying the May 15th put with a strike price of $95 and selling the $90 put would create a Bear Put spread.
This spread was trading for around $1.74 on Monday. That means a trader buying this spread would pay $174 in option premium and would have a maximum profit of $326.
That represents a 187.36% return on risk between now and May 15th if DIS stock falls below $90.
If Disney stock closes above $95 on the expiration date the trade loses the full $174.
The breakeven point for the Bear Put spread is $93.26 which is calculated as $95 minus the $1.74 option premium per contract.
Company Details
The Barchart Technical Opinion rating is a 100% Sell and ranks in the Top 1% of all short term signal directions.
Long term indicators fully support a continuation of the trend.
Walt Disney Company has assets that span movies, television, publishing and theme parks.
In October 2020, Disney reorganized its media and entertainment operations, which had been previously reported in three segments: Media Networks, Studio Entertainment and Direct-to-Consumer & International.
From the first quarter of fiscal 2021, Disney began reporting the financial results of the media and entertainment businesses as one segment, Disney Media and Entertainment Distribution (DMED) across three significant lines of businesses: Linear Networks, Direct to- Consumer and Content Sales/Licensing.
Conclusion And Risk Management
One way to set a stop loss for a Bear Put spread is based on the premium paid. In this case, we paid $174, so we could set a stop loss equal to the 50% of the premium paid, or a loss of around $87.
Another stop loss level could be if the stock broke above $105.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
More news from Barchart
