After DIS had run up $15 to $181 in eight days, I thought it was primed for a pullback
I recommended the Feb19 165/150 put vertical for $2.08.
On Monday, DIS started out up a bit, so the spread could be had for $2.00.
Well, Monday ended up being a pretty volatile day in DIS and SPY.
DIS had an almost eight dollar range with a low of $174.73 and closing at $177.68.
My put spread traded up to $2.85 that day.
Generally, with a profit of 42% that quickly — as in, the same day — I would take my money.
Looking at the DIS chart and SPY trading over a $10 range, I thought the market had more downside.
Well, SPY has since rallied and is up $10 from that Monday’s close.
DIS on the other hand has wallowed (technical term) and hasn’t made a new low.
When I say wallowed, I mean it truly has slowed down its daily trading range.
Take a look at the green line on the bottom of the chart representing the historical volatility, which is the realized or “has happened” volatility of the stock.
It has simply tanked.
The HV went from 51.12 last Monday to 25.66 today!
You know what happens when a stock stops moving, right?
The implied volatility of the options MUST come down.
All that extra added juice or premium in those options needs to come out.
So far, our implied has only come down from 33.84 last Monday to 33.53 yesterday (Tuesday).
Remember, all the factors that go into an option’s price are known EXCEPT VOLATILITY, which is the movement of the underlying stock.
When stocks are flying around, options get pumped with extra premium because the odds are higher that they may end up in the money.
Once a stock settles down, those odds are greatly diminished.
That premium just melts right off and you do not want to be the guy (or gal) holding the bag.
My spread closed today $2.30-$2.60 with DIS down a total of $5.19.
Is DIS going lower? Possibly.
Am I going to wait and see?
I am going to do what I should have done that first day — take the money and run!!
Thanks for reading … See You Next Tuesday!
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