[Options] Streaming Profits

Sean McLaughlin
December 4, 2019

I'm not saying I'm bullish on Disney because my family recently signed up to send them money every month for Disney+, but it certainly has me thinking about the tremendous new source of cashflow to be streaming into their coffers. That's got to be bullish, right?

Of course, at All Star Charts, all we ever follow around here is price so none of the above really matters, it just makes a nice story. But lo and behold, the $DIS chart sure is setting up for a continuation of what already is a pretty significant run:

Scanning volatilities in options, the vol is a little richer than I'd prefer at the moment:

The vol isn't excessive, but I would hesitate to be a straight long buyer of calls here. So I'm going to lower my risk a little and take a bullish stance with a Bull Call Spread.

Here's the Play:

I'm buying a March 155/165 Bull Call Spread for approximately $2.70. This means I'll be long the 155 strike calls and short an equal amount of 165 calls for a net debit. The most I can lose is this initial premium paid for the spread and potential gains are capped at the 165 strike.

During my hold, if $DIS sees a close below 143.50, that will be my signal to close the spread on the next trading day. That tells me my thesis -- at least in the near-term -- is wrong. I'll close the spread for whatever I can salvage and re-evaluate for a better entry.

I'll look to book a profit on this trade when I can capture approximately 50% of the maximum available profit in this spread. The most this spread can be worth is $10.00 (165 strike minus 155 strike). Subtract the premium paid and the most I can earn in this trade is approximately $7.30. When I can capture half of that, I'm out. So I'll be looking to sell this spread for about 6.35-6.50.

All Star Options subscribers can send me questions about this trade and ongoing position management here.

~ @chicagosean

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