Update 4/29/2019: I exited DIS today for a disastrous $8.50 debit, more than eight times the entry premium credit. The stock price gapped up nearly 10%, from $116.60 to $127.91, after Disney announced details of its planned streaming channel. It never fell back.
Shares were trading at $139.72 at the exit, up $24.95. The debit was $7.50 below the entry credit.
Shares rose by 21.7% over 24 days, or a +331% annual rate. The options position produced an 88.2% loss for a -1,342% annual rate.
So, disastrous for this month’s bottom line? Yes. End of the world? Of course not. This is why I do trade sizing, to avoid the possibility that single trade could cause me harm. Like the wise old trader said, “Don’t risk money you can’t afford to lose.”
Take-aways: This was a middling IV range on a well publicized stock. I mean, everyone knows Disney. The earnings announcement was about a month away. However, I knew at entry that the company was rolling out its streaming service. I knew it would be an impact; I underestimated how large it would be.
Trading exchange-traded funds, which provide diversity, is one way of avoiding such unpleasant surprises. Trading less visible companies (i.e., not tech and not entertainment) is another way to mitigate the effect. The risk/reward ratio — 9:1 — magnified the loss, so ensuring a lower ratio would mitigate.
And probably the best way is to accept it as the cost of doing business. I may have a 90% chance of closing profitably on the upside, as I did with this position, but that remaining 10% is a real risk. As the wise old trader also said, “Young fella, 10 percent ain’t peanuts.”
Onward!
I have entered a short iron condor spread on DIS, using options that trade for the last time 42 days hence, on May 17. The premium is a $1.00 credit and the stock at the time of entry was priced at $114.77
The implied volatility rank (IVR) stands at 37.
| Premium: | $1.00 | Expire OTM | |
| DIS-iron condor | Strike | Odds | Delta |
| Long | 135.00 | 99.0% | 1 |
| Break-even | 126.00 | 94.5% | 6 |
| Short | 125.00 | 90.0% | 11 |
| Puts | |||
| Short | 105.00 | 84.0% | 15 |
| Break-even | 96.00 | 90.5% | 9 |
| Long | 95.00 | 97.0% | 3 |
The premium is 10% of the width of the position’s wings.
The risk/reward ratio is 9:1.
By Tim Bovee, Portland, Oregon, April 5, 2019
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.
License
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Based on a work at www.timbovee.com.
Tim Bovee, Private Trader 
[…] DIS opened 10% higher than the prior day’s close, from $116.60 to $127.91, challenging the upper side of my iron condor, after the company announced the launch date and pricing of its new Disney+ streaming service. […]
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[…] DIS, after last week’s large upward gap, is trading at $130, which is above the upside breakeven of $126 but within the wing, which provides some shelter up to $135. With 10 days left until mandatory exit (21 days prior to expiration), I’m happy to let things play out without any adjustment to the position. […]
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[…] DIS remains above the profit zone, and STNE below, each short iron condor having moved out of range upon news reports. […]
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