Disney Ratio Spread Targets A Profit Zone Between 75 and 85

A put ratio spread is an advanced option trade and generally not suitable for beginners, but it can have its place within an option portfolio.

It is generally considered a neutral strategy, although it has the ability to make a profit in up, down and sideways markets.

Yes, it can make money no matter which way the market goes, the key is the timing!

The strategy involves buying a number of put options and selling more put options further out-of-the-money.

The trade is placed when the trader thinks the underlying stock will be stable or slowly move lower and finish around the short put strike at expiry.

A fall in implied volatility will benefit the trade and it can also be profitable if the stock moves up early in the trade.

The big risk with the trade is a sharp move lower early in the trade.

Let’s look at an example using Disney (DIS).

Disney Ratio Spread Example

Buying the November 18 put with a strike price of 85 for around $2.60 and selling 2 of the November 18, 80-strike puts for around $1.55 would create a put ratio spread.

As we are selling 2 contracts at $1.55 the trade results in a net credit of $0.50 which is $50 premium.

This is the maximum gain above a stock price of 85. Basically, all the puts would expire worthless and the trader keeps the $50 premium.

A tent-shaped profit zone exists between 75 and 85 with the maximum gain occurring at 80 and is around $550.

This is what the trade looks like as of today:

You can see the main risk in the trade is a drop in price early on. The blue line is the profit and loss at expiration and the purple line is the T+0 line. T+0 just means “today”.

So, we don’t want the stock to get into the profit tent too early.

What about in four weeks’ time? How does the trade look then?

Looking a lot better between say 78 and 100.

One advantage of this trade type is it takes advantage of option skew. Notice the contract we are buying has lower volatility (51.06%) than the contract we are selling (54.21%). Buy low, sell high.

Company Details

Walt Disney Company has assets that span movies, television, publishing and theme parks. In October 2020, Disney reorganized its media and entertainment operations, which had been previously reported in three segments: Media Networks, Studio Entertainment and Direct-to-Consumer & International. From the first quarter of fiscal 2021, Disney began reporting the financial results of the media and entertainment businesses as one segment, Disney Media and Entertainment Distribution (DMED) across three significant lines of businesses: Linear Networks, Direct to- Consumer and Content Sales/Licensing.

The Barchart Technical Opinion rating is a 88% Sell with a Strongest short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

The market is approaching oversold territory. Be watchful of a trend reversal.

Summary

This strategy should move fairly slowly, unless there is a sharp drop in the stock price. 

As the trade involves naked options, it is not recommended for beginners.

You can do this on other stocks as well, but remember to start small until you understand a bit more about how this all works.

Mitigating Risk

With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.

A stop loss of $200 might make sense in this scenario. If Disney is below 80 near expiry, there will be assignment risk

If you have questions on this strategy, please let me know.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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