On April 10th prior to Disney’s (DIS) Investor Day presentation to detail their plans for their over the top service Disney+ I laid out a bullish thesis for the stock and a defined risk way to play for a breakout in the months to come (read here). As one does from time to time, I got the idea right, the direction right but the timing and the magnitude of the move wrong… to refresh here was the trade idea from April 10th:
DIS ($117) BUY SEPT 120 – MAY 125 CALL CALENDAR FOR $4
-Buy to open 1 Sept 120 call for $5
-Sell to open 1 May 125 call at $1
Break-even on May expiration:
Profits capped at 125, but the May 125 call has only about a 20% probability of being in the money, with the strong likelihood that the stock is below $125 and the short call expires worthless or can be covered for pennies after their May 8th earnings. The best case scenario on May expiration is that the stock rises above the long 120 Sept strike but below the short 125 May strike and the short strike can then be rolled either again in a diagonal, maybe in June or July expiration, or turned into a vertical call spread by selling a higher strike call in Sept expiration.
This trade idea risks 3.5% of the stock price, but has the potential for that risk to be further reduced over the course of the trade. The worst case scenario is that the stock plunges and the long Sept 120 call loses most of its value.
Following the investor day, the stock gapped 10% the next day and continued up 22% to a new all-time high Monday before this week’s 5% reversal.
Looking at the trade idea above lets breakdown how it has done with the stock up $17, or nearly 15% in a few weeks…
First, the idea was to play for a near-term bounce (prior to May expiration), but not much more than $125, the problem with the trade is that the stock gapped the day after the presentation above $125 and never looked back. The May 125 call that was sold short at $1 is now worth ~$9.80 for a loss of $8.80 (vs stock $134) and the Sept 120 call that was bought for $5 is now worth ~$13.80 for a gain of $8.80. So if you were to close this trade that cost $4 when the stock was $117 on April 10th today, when the stock is $134 you would net a gain of zilch, nada, nothing… wow, that was a really bad trade. I mean, it is certainly better than getting a sharp stick in the eye but it is important to remember that trading options around fundamental events can be hard, usually harder than merely picking a direction in the stock and buying or selling it, as you need to get a couple more things right than just direction, timing and magnitude of the move, and in this case I got both wrong.