Positioning to Buy Disney on a Dip

• Posted by Greg Harmon
• on November 19th, 2014

Seems like every other day the market makes a new high, but with some kind of divergence or lack of breadth. Something that causes a roar in the pundit world about a pullback. It is hard to ignore. It is not a great way to make money, always selling as your stock hits a new high. In fact it is counter to what you should be doing.

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. If it does come what do you want to own?

For me, I have positions in Walt Disney, $DIS, but not for every client. And I would love to get the rest of them into the stock. One way to do so is through using a low or no cost options strategy called a ratio put spread.

This is buying a put and then selling downside strike puts. In a 1×2 ratio put spread you sell 2 puts at the lower strike. This creates an ability to profit if the stock falls some, and enter at a much lower price if it reaches the lower strike.

In Disney the chart above shows it fully recovering from the market pullback in October, but then 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 this for a profit. At 85 the position is worth $2.50 and then it loses penny for penny with the stock below that until 82.50.

Additionally, a close below 85 on December Expiry I will be put the stock. But my basis will be 82.50. From looking at the chart that seems like a great place to own it. This trade cost 6 cents to put on.

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