Positioning To Buy Disney On A Dip
Gregory W. Harmon | Nov 19, 2014 04:16PM ET
Seems like every other day the market makes a new high, yet with some kind of divergence or lack of breadth that causes an uproar about a pullback. It's hard to ignore and not the best way to make money -- selling as your stock hits a new high. In fact, it's counter to how you should be trading.
I have written about how to protect positions you want to keep for the long haul from that pullback, so lets leave that piece aside for now and dream about that pullback.
What Do You Want To Own?
I have positions in DIS , but not for every client. And I would love to get the rest of them into that stock. One way to do so is by using a low- or no-cost options strategy called a 'ratio put spread', which is simply buying a put, then selling downside strike puts. In a 1×2-ratio put spread you sell 2 puts at the lower strike. That creates the ability to profit if the stock falls, and the ability to enter at a much lower price if it reaches the lower strike.
In the Disney chart above, we see it fully recovering from the October market pullback, before selling off on its earnings report in early November. It now looks like it may pullback further as the momentum indicators are turning lower. To take advantage of this and create an entry, I traded the December 87.5/85 1×2 Put-Ratio Spread. If the stock pulls back under 87.5, I can sell it for a profit. At 85, the position is worth $2.50, after which it loses penny-for-penny with the stock below that until 82.50.
Additionally, a close below 85 on December Expiry and I'll be put the stock. But my basis will be 82.50. Based on the chart, that seems like a great place to own it. This trade cost 6 cents to put on.
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